Covid-19 Pressure upon the Insurance Industry

General or Life Insurance, What are the Implications?

20 April 2020
As the Covid-19 pandemic continues to wreck havoc on many aspects, numerous business players have started to take anticipative measures to support the continuity of their businesses. This is addressed by exhausting the external incentives and sources provided by the government, or by instigating their internal risk management system, such as insurance. Whilst insurance companies are preparing themselves to receive major claims from the customers – private entity or individual, there is still major discussion on whether the pandemic situation would trigger the business interruption coverage under the policy. The main questions are: would the insurance company agree to cover this loss? Is there any potential long-term impact that might occur from this decision?
General Insurance
As we have seen, numerous cities around the globe, authorities have pro-actively implemented lockdown to flatten the virus curve. Offices, schools, cafes and restaurants, cinemas, hotels and other business are forced to close down. Many will seek relief through insurance claims based on Business Interruption coverage.
Business Interruption (“BI”) Coverage
While there was an effort of some insurers to sell “Business Insurance” plans that are completed with virus coverage, BI is typically not a stand-alone policy, but extension part of the overall comprehensive property insurance. Many policies sold in Indonesia essentially utilize the BI clause template provided under Industrial All Risk (IAR) Munich Re (1991), as follows:
 “The insurers agree that if during the period on insurance the business carried on by the insured at the premises specified in the Schedule is interrupted of interfered with in consequence of loss destruction or damage indemnifiable under Section I, then the Insurers shall indemnify the insured for the amount of loss as hereinafter defined resulting from such interruption or interference provided that the liability of the insurers in no case exceeds the sum insured or such other sum as many hereinafter be substituted therefore by Endorsement signed by or on behalf of the Insurers.   
Given the sample above, it is clear that the purpose of the BI coverage is to protect the insured from quantifiable financial loss caused by interruption in its operations as a result of “direct physical loss or damage” to the insured premise. 

Physical Damage Requirement
BI policy has always been adopting Material Damage Proviso Waiver principle in the policy, which requires material damage (i.e. physical damage) in the insured asset before BI is triggered. As such, the awaited question pertaining to the current pandemic is: How should we interpret the physical damage? Could we stretch this interpretation to cover the Covid-19 situation? 
Common examples to this event would be a natural disaster, fire or flood to a warehouse, shop-house or building. In general exercise, it is also necessary to show the damage property in order to make the BI claim. If the virus has corrupted the building and adversely changed the property – like most of BI claims, then it would likely constitute as physical damage. But since according to WHO, the novel corona virus may sit on the surface of a property for few hours and even up to several days (under different conditions). Insurers would argue that there is no destruction and the existence of Covid-19 could not definitively prove the material damage to the premise.
Since BI is an optional coverage, therefore the insureds would not be able to claim any losses if the BI purchased policy is written in plain using standard wordings without any specific phrases related to events such as the Covid-19. If, the policy has had BI extensions, the success rate of the claim is also low because the existence of COVID-19 in the property insured does not cause physical loss or material damage.
Non-Physical Damage BI Coverage
Unlike the above, some BI extension whether it is bespoke or amended by the parties, covers claims which are caused by infectious or contagious diseases, vermin, pests or defective sanitary arrangements, food or drink poisoning, murder, suicide. This non-physical requirement clause(s) should be relevant to cover losses within the BI, pertaining to the Covid-19 situation. The insureds need to take attention to some embedded items – which relate to Covid - 19 are as follows:
Communicable/Notifiable Disease – As an initial requirement to make a claim, the insureds need to make sure that coronavirus is a communicable/notifiable disease. In Indonesia, the Minister of Health declared Covid-19 as a disease that could cause outbreak and its mitigation on 4 February 2020 based on Decree No. HK.01.07/MENKES/104/2020.
Closure or Evacuation by Government Order – Business closure occurs due to government instruction and not by sole initiative by the business owner. For the insureds, this clause is quite troubling since many of closure happens due to government’s advisory to public for self-quarantine as a precautionary action against the continual increasing of infected people. This means that the insurer will cover any losses incurred due to business closure after the government’s order and will not cover any losses prior to that.
Discovery of Organism at the Premises or Occurring in the Vicinity of Premises – This clause requires evidence that the virus/organism detected within certain vicinity of premises or exist in the premise. For example, one of the insured’s employees is confirmed positive for Covid-19 would therefore be required to cease operations in order prevent the spread of disease to others.
Loss of Attraction – this extension is intended to cover BI loss caused by destruction of attractions (e.g amusement parks) nearby the insured premises (but not the damage to the insured’s premises itself). For example: if a tourist attraction is closed due to terrorism or riots, then nearby shops and restaurants will gradually decrease in operations. This extensions, mostly requires physical damages to the property in the vicinity to the insured premise’s area.
Life Insurance
While there is uncertainty on general coverage, health insurance in general mostly covers treatment for any necessary medical services related to pandemic viruses. Therefore, it is not necessary to purchase a specific health plan for Covid-19 related treatments.
Government’s Warranty and Additional Benefit by Insurers
Under the Ministry of Health decree HK.01.07/MENKES/104/2020 it is stipulated that Covid-19 outbreak is an extraordinary event, so its medical bills of confirmed coronavirus patients are covered by the Indonesian Health Ministry and regional administrations, including those suspected patients who are reported before the effective date of the decree (4 February 2020).
Some giant insurers in Indonesia also have issued additional benefits on top of health coverage, for any policyholders of Covid-19 suspect. However, terms and conditions may be differ from one insurer compared to another insurer; therefore it is advisable for individuals to further review their health plan policy and directly consult to the insurer directly on the additional benefit related to Covid-19.
OJK Leniency to Unit Link Products
One of the most difficult challenges faced by life insurance is how extreme market volatility – equities, debt instruments, government securities, affects the value of unit-linked product. As OJK has issued economic stimulus and regulatory leniency for insurers in Indonesia, insurers and reinsurers can value the debt securities asset based on amortized acquisition value to calculate the solvability ratio. Secondly, OJK has instructed insurer to extend the premium payment deadline (including co-insurance, reinsurance, tabarru fund and ujrah) from 2 (two) months to become 4 (four) months since the due date payment, for all premium payable in February 2020. Further, any asset incurred from leasing contract can be acknowledged as permitted asset/admitted asset with the value equal to the liability incurred from the leasing contract. 
What’s next?
There are couple items for the insurer to review:
a. To consider issuing additional or new wordings on exclusion or endorsement of contagious/communicable disease to the insurance policy in the future. In March 2020, Lloyd’s Market Association has issued standard wordings specific for Corona Virus Exclusion for Personal Accident Market (Accident and Health); Communicable Disease Exclusion (Property Treaty Reinsurance) and Communicable Disease Endorsement (Property Contracts).
b. For the health insurer, it is best to give clear information on the terms and conditions of additional benefit (i.e., how much is the benefit, if it is applicable for certain length of time and can be terminated at any time, etc.).
a. The insureds must probe into the policy wordings, including exclusions, coverage limits and applicable deductibles. For better assurance, insureds could consult with an agent or an insurance company. While there are standard wordings commonly adopt in Indonesia (i.e., IAR Munich Re), specific arrangement probably covers BI due to Covid-19. Policyholders in the future can purchase an extension of cover in respect of communicable/notifiable disease. Although after SARS, many insurers began to exclude losses incurred by communicable/notifiable disease in most policies, it is probably coverage able if specifically pre-negotiated by the parties. In other words, it is still possible to get coverage of losses from business interruption due to communicable/notifiable disease.   
b. For health insurance, insureds need to take attention on the covering period set out by the insurance company. Secondly, to check if the covering given in a form of cash – direct transfer to the insureds or if it is a unit-linked product, some insurers place the benefit into the investment (i.e., mutual funds).
If there are any queries with regards to how this may affect your business, please contact us for further legal consultation.
This information does not, and is not intended to, constitute as legal advice; instead, all information, content, and materials are for general information only
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