Coronavirus will highlight the protection gap in China

Amidst the ongoing outbreak in China, the financial risks to the insurance industry remain highly uncertain. This will highlight the protection gap in China and the need for more life and health insurance, alongside more comprehensive critical illness cover, according to a new equity research report, Virus Risks - 2019 nCoV from American multinational investment bank Jefferies.

“More broadly, some of the most costly consequences could affect the non-life industry, where business interruption and event cancellation risks are rising,” states the report.
With relatively small numbers of fatalities (around 2 percent), primarily amongst regions and socio-economic groups with a high protection gap, the life insurance ramifications of this tragedy would appear to be limited, according to the report.

“Moreover, as almost all critical illness policies only provide cover for named morbidity perils and this virus was unknown to science until late 2019, it would appear unlikely that this virus is a covered event,” it states. “To our mind, any potential exposure would most likely emerge from blanket policies that cover more general ILI (Influenza-Like-Illness) with Pneumonia/SARS MERS symptoms, where we would be surprised if many (if any) were in-force.”

The report adds that more the impacts on business interruption and travel insurance from the enforced quarantine of large urban areas and reduced access to transport are ore material financially; therefore it is possible that the virus could be more material for the non-life sector than life.

More specifically, the report notes that there are several international events that could be at risk of cancellation. Most notable is the Shanghai Grand Prix, one of the earliest in the 2020 season, which is scheduled for April 19.

Even earlier, but perhaps less at risk, is the Hanoi Grand Prix set for April 5 in neighbouring Vietnam. The report states that Lloyd's of London and Swiss Re could be most at risk. “In terms of the most exposed insurers, we highlight Hiscox and Beazley, as we expect that bespoke cover such as event cancellation is most likely to be written in Lloyd's of London,” states the report. “More generally, although China contributes just 1.6 percent of Swiss Re's L&H premium, it makes up over 7 percent of P&C Re. While this could suggest that Swiss Re is one of the most exposed, we expect that a small fraction of this covers commercial and business interruption, with the vast majority writing motor.”

Beyond the traditional insurance and reinsurance covers, Jefferies notes that the IBRD's first pandemic bond could be at risk. Structured by Swiss Re and Munich Re, these $320m notes have a parametric trigger, which for the riskiest Class B notes is set at 250 deaths across multiple countries (>20 deaths each). These notes may also be at risk from the recent Ebola outbreak in the DRC, it adds.

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