While SARS has not created any large scale claims as was the case with the World Trade Center, the multitude of small claims is adding up, with a prediction of damages reaching billions of pounds. It is still too early to tell what the final figure will be, says Jonathan Clark
Severe Acute Respiratory Syndrome (SARS) has dominated news coverage around the world since March this year. This fast-spreading pneumonia-like virus has had devastating consequences for the populations of affected countries. However, it is the impact on local economies that has been the most dramatic outcome of this disease.
While the human cost of SARS has dominated the headlines, other victims have also emerged. In Asia, SARS is virulently affecting the travel trade and retail sectors, as people are now reluctant to go to shops or travel on local transport. In addition, there have been widespread cancellations of holidays and of large-scale events planned in the region, such as the Rolling Stones concerts in Beijing and Shanghai. The effect on the manufacturing sector has also been significant, with many factories suspending operations as a risk management precaution.
Organisers cancel events when it is not viable from a risk perspective to go ahead with planned activity. Insurance is a fundamental component of the event financing package. It enables the organisers to secure borrowing for the event and ensures that they do not suffer financial disaster should the event be called off. In terms of business interruption cover, these policies are innovative solutions to specific industry needs. A wide variety of products are available, for example offering extensions to cover the impact of diseases, and advanced loss-of-profit programmes. The benefit of these wider covers was evident during the UK foot and mouth crisis. Such insurance, like cancellation, postponement and relocation covers, is generally written in on an all risks basis. While there are exclusions, cover is provided for loss of profit and additional expenses due to cancellation, abandonment, postponement or relocation due to any cause beyond the control of the policyholder.
The role of insurance in situations such as SARS is fundamentally a societal one: to keep economies going. For the risk manager, it is about analysing the difference between the actual and perceived risk and developing a well planned response. So, what can risk managers and the insurance industry learn from the SARS outbreak?
As far as claims are concerned, the SARS outbreak once again reinforces the message that business interruption claims of great magnitude can be triggered by events that cause only limited material damage. All too often business interruption is considered as supplemental to material damage, the potential cost of the latter being calculated to the last dollar for probable maximum loss purposes. It is then assumed that the business interruption cost will run parallel. This is not the case, and the message continues to need reinforcing.
From a claims perspective there are two obvious trends driving business interruption exposures:
Looking firstly at the aggregation of risks, city centres continue to see loss accumulation rise. There are now several mega-cities around the world which represent significant aggregations of risk - for example, Hong Kong, with its significant tourist market. This is a complex area and one that needs careful handling in the claims situation.
Supplier bottlenecks and the disabling of business systems are also increasing exposures. In China, access to markets is already a problem, and manufacturers are having to shut down production of goods. The number of shifts worked has decreased, as the impact of SARS has meant fewer consumers are visiting shops. There are also supplier bottlenecks, as critical elements of manufacturing are held up.
Both trends were seen following the terrorist attack on the World Trade Center. However, in the case of SARS, we are seeing significant impact on economies and, in turn, on business interruption exposures without a major level of physical damage.
The full impact of the SARS crisis is not yet clear. As ever, it seems likely that uninsured losses will exceed those insured. However, the insurance industry has a key role to play in future events such as SARS by providing innovative products allowing businesses to manage a variety of events and economic situations. The accumulation of risk is also creating the need for sophisticated claims handling techniques and knowledge. The risk manager will play a pivotal role in this by recognising the relationship between the actual risk and the less tangible possible effects.
Jonathan Clark, SVP Business Solutions Group, Crawford & Company International Inc, Tel: 020 7265 4027, E-mail:
jonathan.clark@crawco.co.uk
