Large commercial property insurer FM Global added communicable disease coverage as a standard element of its core product back in 2016, in a response to requests from some clients. But the coverage didn’t really strike a chord with the overall customer base, and there have been few claims.
“It wasn’t something that got a lot of press,” Kevin Ingram, FM Global’s finance chief, told CFO in a visit to its New York office on March 11. “I think it’s going to get some press now.”
FM Global has heard from policyholders around the world that are planning to report coronavirus-related losses under the coverage. As with some other types of insurance coverage, though, exactly what it covers is sometimes misunderstood.
The costs of cleaning up contamination related to communicable diseases, as well as losses stemming from the closure of company facilities to enable such cleanup, are covered, within sublimits.
But there has to be a discrete insurable event that caused the loss. Notably, the policy doesn’t cover government-mandated closures, such as in the current case of restaurants and bars in many jurisdictions. “There had to have been someone who was actually on-site with the disease,” Ingram noted.
Because of the policy sublimits, FM Global won’t be on the hook for a devastating financial blow from communicable disease claims. The company is sitting on almost $15 billion of capital, and the potential claims are no more than the tens of millions of dollars, according to Ingram.
“There will certainly be an earnings impact. I think we’ll absorb it in the earnings this year, although we’ll have to see how it plays out,” he said.
We addressed several other aspects of the coronavirus with Ingram. An edited transcript of the discussion follows.
Yes, we have a dedicated group of people on this. They work with clients on business continuity. Which facilities are the important ones to keep in business? What alternate arrangements do you need to make sure you have so you can continue to produce your product?
Last week I was talking to the CFO of a client that makes medical products. She told me that there are two major manufacturers in the world for a base product used in making antibiotics, one in China and one in India. And both governments decided they’re not going to export that product anymore until they’re sure they [won’t need it domestically]. The client has to find somebody else that can manufacture it, but that’s going to take time.
The issue there is the long-term resilience of your supply chain. Maybe you have a supplier in Italy that’s supplying you with motors. Unless you have an alternative supplier, you have a problem. You need to have done that earlier. You always need to have business contingency plans in place that identify alternative suppliers.
Any multinational company already has had operations shut down somewhere.
Right. But I don’t think many people thought there could be a situation like this, with a virus moving around the world as quickly as this.
We’ve shut down eight offices. We’d never had a situation where we had to close so many offices within a month for the same reason. We’ve been tested before with snow closings, earthquakes, and bad weather, but in those cases we just closed one office, or maybe two.
Starting in January we closed down our Shenzhen, Shanghai, and Hong Kong offices and told our employees to work from home.
Then we went to our offices in Singapore, Japan, Malaysia, and South Korea and said, split yourselves into an A team and a B team. The A team works in the office one week, while the B team works at home. Then you flip that the next week to make sure you don’t risk contamination of the entire team. We later shut down the South Korea office when the epidemic got worse there.
Now we’ve now shut down our offices in Milan, Seattle, and the Boston area. We’ve also postponed a lot of training.
It’s really all about the coronavirus, plain and simple. Nobody’s thinking about anything else right now. Well, that and the market, which is being driven by oil as well as the coronavirus.
The thing is, while we’re learning a lot of stuff now, people have short memories. We could get to the end of the year and suddenly the next crisis, a big hurricane or something else, comes along and diverts attention away from the coronavirus. And then something else happens.
Then you’re back to pandemic season again. Have you done what you needed to do? Have you built that resilience into your processes, built your business continuity, and tested your contingency plans to ensure that if something like this happens again you’re ready for it?