The Insurance Impacts of 2019 Novel Coronavirus

So how do you cater for such an event in your Business Continuity Planning?

The outbreak of 2019 Novel Coronavirus (2019-nCoV), in Wuhan City, Hubei Province of China, has prompted questions of how insurance policies might respond to claims stemming from business losses attributed to this infection prompting this White Paper. The primary virus infection, which can result in pneumonia and even death, originated from a Wuhan city seafood market.

Subsequently, person-to-person transmission has occurred, primarily to health workers who had contact with those initially infected. The concern is that this may lead to widespread infections, worldwide.

As Corona Virus shows no signs of slowing, its wider impact is beginning to manifest itself commercially across the globe:

• Alibaba are reporting delivery delays and near-term challenges for the business

• JCB are reducing production due to reduced parts supply from China

• Oil prices are falling as China, the largest consumer of oil, reduces consumption

• The Financial Markets are reacting to the uncertainty

Coronavirus is being labelled a Black Swan event, that is “an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences”. But is it? Its Flu season after all and we have seen these before, most recently with SARS.

Black swan events are characterised by their extreme rarity, their severe impact and the practice of explaining widespread failure to predict them as simple folly in hindsight. 

So how do you cater for such an event?

One way of approaching Business Continuity is to focus on the possible threats to the business and focus the Business Continuity process on these. This might start with the Risk Register and business Risk Assessment which structures the planning.

This is a perfectly logical approach because you can’t plan for everything, but it does leave the business vulnerable should a different unconsidered event occur – a Black Swan.

Let's first consider what Business Continuity is:

• Businesses generate turnover and profit by delivering their products/services and they do this to a specification/price/time that meets their customer’s needs.

• They do this by utilising their Assets and Resources, whether tangible or intangible

• If they lose use of these Assets and Resources, for whatever reason, this will affect their ability to deliver the product/service and at some point, this will impact on their customers.

• At some point those customers will have to react to avoid disruption to their own business

• In turn this will become irreparably damaging to the business – this is known as the Maximum Tolerable Period of Disruption.

The Business Continuity enables an organisation to:

• • minimise the likelihood of disruption

  • allows it to reinstate the delivery of its products/services before the business is irreparably damaged and

  • provide a structure to manage any incident in a coordinated, cohesive manner creating maximum certainty for its stakeholders

Another way to approach Business Continuity is to start your process by understanding your business’ “Maximum Tolerable Period of Disruption", the Key Assets and Resources you need to deliver your products and services and the timescales within which you can reinstate these Assets/Resources.

By looking at the ability/timescales to recover the Assets/Resources and comparing this to the Maximum Tolerable Period of Disruption and the levels of the Asset/Resource you need, you can establish Recovery Time Objectives for these and then identify where Business Continuity arrangements need to be developed.

This process is known as Business Impact Analysis or BIA and it is an essential component in the business understanding of what its business continuity needs are. If you haven't established that after 10 days of non-service delivery you have lost 50% of your customers and after 25 days exhausted your cash reserves then you may be building a BCP that doesn't protect the business.

In the supply chain this may mean running dual suppliers that are in geographically diverse locations. This is particularly relevant in China where towns tend to focus on a single product area. Yes, there may be costs involved for example duplicate tooling, but it provides commercial leverage and resilience.

Similarly, if you consider your workforce as a key Asset/Resource, in an event such as Corona Virus you need to understand how to resource the business if there is a loss/partial loss of workforce, then whether it’s a lottery win or pandemic you are protected.

This approach to Business Continuity Planning is focused on the ability to reinstate your Assets/Resources, regardless of the event rather than specific events and as such help you mitigate the Black Swans as much as possible. You can't plan for everything, but you can plan for anything.

Our recommendation is to develop a Business Continuity Plan (BCP).  As part of your pandemic planning process we recommend you to:

• Identify core services, and what is needed to maintain your supply chain

• Identify staffing arrangements, such as telecommuting, succession planning and cross-skilling

• Protect the health of your staff

• Develop a communications strategy for employees, customers and suppliers

• Consider financial implications, such as cash flow, cost increases and insurance

• Identify contingency plans for the unexpected

• Schedule how the plan will be tested and updated

• Understand your regulatory and reporting compliance requirements

You should identify, mitigate, and monitor risks and escalate issues at your organization, here are some recommended actions as you build or review your BCP.

• Maintain a checklist identifying where your organisation may have gaps and what best practice items should be included as part of your program.

• Risk management planning for a pandemic involves identifying risks, assessing the impact of risks and developing strategies to manage risks to your business.

• Make sure government and public resource contacts are available for each of your offices for compliance and assistance.

• Have a communication plan available to your employees outlining policies and specific steps of what will happen in different scenarios and how to access your information. We’re here to help if you need it.

• Create a centralised incident repository for issues and events.  If possible, create categorization and routing to make risk management easier.

• Aggregate risks, activities and incident information to your Board of Directors, regulatory authorities and local & national representatives as appropriate.  As new information for evolving concerns are validated, changes to policies and procedures need to be updated, reviewed and implemented.

We advise clients to scrutinize their policies to find out what will govern coverage in the event of a business interruption loss. Every insurer, insured and insurance policy are different. In order to pay out recovery costs, insurers would need to establish a fact pattern that supports a claim. Work with your broker to understand your policy and see whether coverage might apply.

And always follow precautions to keep employees safe by staying up‐to‐date on recommended travel restrictions and preventative measures.

Want to Learn more?

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Additional articles:

Coronavirus - business interruption what cover do I have

Coronavirus - business interruption - Am I covered

Managing Director 01245 449060 matthew.collins@ascendbrokingold.co.uk