Date posted: 19/05/2020 5 min read

What’s the deal with pandemic insurance?

Pandemic insurance is usually only bought by organisers of big sports events. But one CA is kicking himself he didn’t get it.

In Brief

  • Pandemic insurance is pricey and beyond the reach of most business organisations.
  • Once-in-100-year events are occurring more frequently, pushing up the number of insurance claims.
  • If insurance premiums become unaffordable, the cost of rebuilding will fall to governments and taxpayers.

By Stephen Corby

As people from all walks of life and all nations struggle to come to terms with the way COVID-19 has plagued their industries or killed their jobs, it’s been at least slightly reassuring to be able to shrug and say, “well, it’s not like we could have seen it coming”.

But Cormac Denton CA, chief financial officer of Wellington’s Kāpura hospitality group, isn’t shrugging. He’s too busy kicking himself. Because he was far enough in front of the coronavirus curve that he actually, almost, managed to buy pandemic insurance for his company.

“In my team, I have a guy from Wuhan who came back in early January from China, just before his parents got locked in their homes (he missed the lock-up by three or four days). And we were getting updates from his parents over there,” says Denton.

“Seeing that, I went straight to our insurance company at the end of January and said, ‘Right, is there such a thing as pandemic insurance, and can we get it?’” Denton, 37, recalls, with a rueful laugh.

“Our insurance broker went to Lloyd’s in the UK and came back and said it did exist, but it was quite expensive and normally only taken out by big sporting events, like the Olympics, which stand to lose millions.”

Hefty cost of pandemic insurance

Sure enough, after this year’s Wimbledon tennis championship was cancelled, it was revealed that the All England Lawn Tennis Club was one of the few organisations in the world to have received a payout on its pandemic insurance.

The tennis club had taken out the insurance for the past 17 years, paying US$34 million (£25.5m) over that time, and would be receiving a US$141 million (£114m) payout in 2020 – enough to recoup almost half its losses from the cancellation.

Denton asked his broker to get a price and was told to expect a figure as high as a quarter or a half of Kāpura’s EBIT of NZ$10 million to $12 million a year.

“He was just estimating, but I asked him to get us a quote anyway, and by the time it had looped around and come back to us, the virus had broken in Italy and it was just too far gone to get insurance,” Denton recalls.

“In hindsight I do think, what if I’d just gone in hard in January and said, ‘I need a price, I want to sign up today’? I try not to kick myself too hard, but it’s one of those things where you wonder what might have happened.”

What did happen is that New Zealand’s level-four lockdown crushed the life out of the 35 bars and restaurants Kāpura runs, prompting Denton to look at the structure of the company and decide it would have to do without staff working in “strategic roles” – that is, about half of all its office workers. That meant signing off on making not only his whole team redundant, but himself as well.

“I’m working out my month’s notice now, but I’ve been here a long time, we’ve been through a lot – and if the guys who run the company get into any strife, I’ve told them they can always call me for help,” he says, cheerily.

What’s the fallout from high insurance costs?

Across the ditch in Australia, the pandemic came on the heels of devastating drought, unprecedented fires and then floods in February.

Karen McWilliams FCA, business reform leader at Chartered Accountants Australia and New Zealand, says even before the coronavirus there was plenty of talk in the industry about how the frequency of high-cost events – caused by climate change – was reframing the way businesses look at insurance.

“The price of insurance, in some areas, could simply become unviable. The example put to me was that if there’s a likelihood that a cyclone is going to blow your house away every five years, then the price of your premiums is going to be one-fifth of your house, and people aren’t going to be willing to pay that,” McWilliams explains.

“As the likelihood of high-impact events increases, if people say, ‘I can’t afford that insurance’, then where does that cost fall on society? Are governments forced to step in?”

“As the likelihood of high-impact events increases, if people say, ‘I can’t afford that insurance’, then where does that cost fall on society?”
Karen McWilliams FCA, CA ANZ

Perhaps our national governments may want to place a call to Lloyd’s of London itself about pandemic insurance. Waiting too long can be expensive.

Read more:

Read more about Cormac Denton in the June/July issue of Acuity, available from June 1. 

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