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Insider In Full: Coronavirus cancellations threaten stressed contingency market

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Concern is mounting in the contingency market about the potential impact of events cancelled because of the coronavirus, especially if it starts to prompt major cancellations outside China...

Samuel Casey

Concern is mounting in the contingency market about the potential impact of events cancelled because of the coronavirus, especially if it starts to prompt major cancellations outside China.  

To date, the loss experience has not been material, but underwriters warned that if the outbreak persists and spreads outside China it could be “catastrophic” for the market. Sources said it was too early to gauge the full impact the virus would have and in recent commentary C-suite executives have played down concerns about the immediate consequences of the virus.

Nevertheless, carriers are examining their books to assess the level of exposure they have in the region, with the greatest fear being any impact on the Tokyo Olympics, one of the biggest events the market insures, which is due to take place in July and August of this year.

The Tokyo Marathon scheduled to take place in March has already been scaled back to include only elite runners, an early indication of the effect the virus could have on major sporting events in the area. 

The outbreak is believed to have originated in the Wuhan province of China and has already caused the deaths of over 2,000 people and prompted the cancellation of several events, some of which are expected to be losses to the market.

The coronavirus is the latest risk to impact an already stretched contingency market, with rate growth believed to be sluggish compared to other lines of (re)insurance business due to an abundance of capacity and some insurers pursuing aggressive top-line growth.

2019 was a year of challenging losses for the market, including several music festival cancellations in the UK, the disrupted Rugby World Cup in Japan and a sizeable prize indemnity loss from a Lottoland lottery payout.

Market sources said there had been some rating adjustments as a result, especially for music festivals, but there was consensus that prices need to increase further to achieve a comfortable level of rate adequacy.

Despite the pullback by Swiss Re Corporate Solutions last summer – which was a major player in the market – there is still an abundance of capacity in the sector, making it harder to push for rate rises.

Underwriting sources were hopeful that the coronavirus scare could prompt a rating response, but said that it was too early for anything to have materialised.

Communicable disease exclusions

Requests are now coming in for underwriters to provide additional cover in case of cancellation due to coronavirus, but the market is responding cautiously, and in most cases explicitly excluding coronavirus on new contracts.

A number of events have already been cancelled and postponed in and around China because of the virus. 

The cancellation of the Art Basel exhibition, which was due to take place at the end of March in Hong Kong, is expected to be a loss to the market, according to sources.

Meanwhile, the cancellation of the Mobile World Congress in Barcelona, which normally draws 100,000 visitors to the city, is not expected to be a loss because both local and national health officials said it would be safe to go ahead.

Cancellation as a result of communicable disease is a standard exclusion on Lloyd’s contingency contracts but it can be bought back for an additional premium, which happens with reasonable frequency.

The market has a heightened awareness of the potential threat from pandemics following the outbreaks of Sars in 2003, swine flu in 2009 and the Zika virus in 2015. 

All these events prompted underwriters to look closely at their books to assess pandemic exposure, but the market escaped damaging losses.

To trigger a payout, insureds must be able to demonstrate that it was necessary to cancel the event, and that it was not cancelled due to disinclination or a possible lack of attendees.

Potential exposures

Equity analyst firm Jefferies has previously highlighted that the contingency market could be at risk from coronavirus, naming Beazley and Hiscox as possible carriers with large exposures. 

Beazley and Hiscox are both established lead markets in event cancellation, as is Tokio Marine HCC.

Both Beazley and Hiscox subsequently played down the threat to their contingency books.

Hiscox said in a statement following the analyst note: “We are a lead market in contingency (event cancellation) at Lloyd’s but we don’t have any significant exposure to this peril on any major events in China or surrounding territories in the next few months.” 

Beazley said that an analysis of its book has revealed only $25mn of potential exposure due to the protection of its reinsurance cover.

 

 

 

CEO Andrew Horton told this publication in an interview last week: “A lot of contingency policies don’t cover pandemic anyway, a limited number do and then we have a reinsurance programme that picks up any systemic issue for us.”

The coronavirus is not expected to have a major impact on the wider (re)insurance market, although there could be knock-on effects from any stalling in global economic growth. 

Lloyd’s chairman Bruce Carnegie-Brown told BBC Radio 4’s Today programme last week that most of the economic losses will likely be uninsured.

He said: “The suspicion is that it will be a reasonably underinsured event, partly because Asia is less insured than other parts of the world and partly because the virus is new so there isn’t a lot of insurance in place for it.” 

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