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qualibroker

On COVID-19 and its impact on the global economy

Date:   lundi 9 mars 2020
Auteur:   Qualibroker

As of March 4th, 2020, there have been 93574 cas­es of coro­n­avirus (COVID-19) across 81 coun­tries and ter­ri­to­ries, with a death toll of 3204, and increas­ing. Although these num­bers and the lin­ear increase of total case num­bers are alarm­ing, there are still rea­sons to remain opti­mistic as among the 93547 infect­ed, 54406 have already total­ly recov­ered from the virus, and with­in the 39833 cas­es that remain, 33058 are in mild condition.

Also, since Feb­ru­ary 19th, the num­ber of dai­ly new cas­es has been infe­ri­or to the num­ber of recov­ered patients, which result­ed in a steady decline of active cases.

We still can’t say that the worse is over, and there are no guar­an­tees that the down­turn of the active cas­es will con­tin­ue at this rate. How­ev­er, it already starts to look like the eco­nom­ic impacts of COVID-19 may out­live the virus itself.
Amidst the cur­rent fren­zy that feeds a cul­ture of fear by focus­ing pri­mar­i­ly on the num­ber of cas­es and the death toll, we have seen a num­ber of insti­tu­tion­al or gov­ern­men­tal mea­sures, with some more jus­ti­fied than the oth­ers both in their nature and in their scale: many fac­to­ries in Chi­na stopped pro­duc­tion to slow the spread of the virus, com­pa­nies like Ama­zon and Nestlé sus­pend­ed inter­na­tion­al trav­els of their employ­ees, The Swiss gov­ern­ment has banned all pub­lic and pri­vate gath­er­ings of more than a thou­sand peo­ple until March 15th, France’s Lou­vre Muse­um closed its doors, and so on.
In the end how­ev­er, the cul­mi­na­tion of those mea­sures reached such pro­por­tions that the Organ­i­sa­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment (OECD) recent­ly warned that the glob­al econ­o­my could grow at its slow­est rate since 2009 this year because of the virus and that a longer, «more inten­sive» out­break could tip many coun­tries into reces­sion.
The impacts of epi­demics in the world econ­o­my are hard to pre­dict due to their unique char­ac­ter­is­tics, how­ev­er, accord­ing to a study by the World Bank, a severe pan­dem­ic could cause eco­nom­ic loss­es equal to near­ly 5% of glob­al GDP, or more than $3 tril­lion where­as even loss­es from a weak­er flu pan­dem­ic, such as the 2009 H1N1 virus, can still wipe 0.5% off glob­al GDP.
In that regard the 2019 coro­n­avirus has a twofold impact both on the sup­ply and demand side of the econ­o­my, caus­ing both a dis­rup­tions in sup­ply chains world­wide giv­en China’s impor­tance in the glob­al man­u­fac­tur­ing indus­try; and a reduc­tion in exports towards Chi­na as the local indus­try is run­ning at a slow­er pace along with non-neg­li­gi­ble world­wide loss­es in trans­port, tourism, and events industries.

Insur­ance solutions


In rela­tion to the effects of such an epi­dem­ic, the insur­ance indus­try is ill equipped both in terms of cov­er­ages offered by the under­writ­ers and the poli­cies usu­al­ly con­tract­ed by the insureds. In any case though for real solu­tions to the prob­lems any insur­an­cial approach shall be strong­ly sup­port­ed by a thor­ough risk man­age­ment approach involv­ing a diver­si­fi­ca­tion of sources and pre­de­ter­mined emer­gency back up procedures.

That said, there are some insur­ance prod­ucts that are per­fect answers to the sharp increase on some of the finan­cial risks caused by such events.

Cred­it insurance


Cred­it insur­ance is both an insur­ance pol­i­cy and a risk man­age­ment prod­uct offered by under­writ­ers to busi­ness enti­ties wish­ing to pro­tect their accounts receiv­able from loss due to cred­it risks such as pro­tract­ed default, insol­ven­cy, or bank­rupt­cy of clients. 

The eco­nom­ic dif­fi­cul­ties asso­ci­at­ed with the out­break will undoubt­ed­ly impact the finan­cial capa­bil­i­ties and, there­fore, the sol­ven­cy of many com­pa­nies, and more so in some indus­tries than oth­ers. Client com­pa­nies may strug­gle to make their pay­ments in time, if not ever, and high­er loss­es due to bad debt are to be expected. 

With 2019 already marked, before the impact of COVID-19, by record-high fail­ures of large scale com­pa­nies; with 324 major insol­ven­cies of com­pa­nies with over €50mn of annu­al turnover, rep­re­sent­ing a com­bined rev­enue total­ing to more than €205bn, this is as good a time as any to look over the buy­er cred­it prac­tices adopt­ed by your orga­ni­za­tion and poten­tial­ly sub­scribe a cred­it insur­ance on the whole or part of your accounts receiv­able portfolio. 

It shall also be not­ed that as of now, the under­writ­ers did not take any dras­tic mea­sures to decrease their risk expo­sure fol­low­ing the coro­n­avirus out­break, but the sit­u­a­tion may soon change.

Polit­i­cal risk insurance


If a non-pay­ment or bank­rupt­cy is direct­ly linked to an inter­ven­tion by pub­lic author­i­ties, it is a polit­i­cal risk, which is nor­mal­ly exclud­ed from the stan­dard cov­er­age of a cred­it insur­ance pol­i­cy. An eval­u­a­tion of the cor­re­la­tion between the two is made on a case by case basis.

That said, polit­i­cal risks can be cov­ered by either stand­alone prod­ucts or as an exten­tion to cred­it insur­ance policies. 

One prob­lem that we are fac­ing on that regard is that in the west­ern civ­i­liza­tion, we tend to asso­ciate polit­i­cal risks with least devel­oped coun­tries and it is cer­tain­ly eas­i­er for both under­writ­ers and insureds to imag­ine how the deci­sions by pub­lic author­i­ties in a Mid­dle East­ern coun­try may present a polit­i­cal risk to their busi­ness, where­as for a coun­try such as Switzer­land that risk is per­ceived as non-existant. 

Yet, the deci­sion of the Swiss Fed­er­al Coun­cil to ban all pub­lic and pri­vate gath­er­ings of more than a thou­sand peo­ple where­as no oth­er coun­try has yet tak­en such extreme mea­sures, and any pro­tract­ed default or insol­ven­cy relat­ed to that deci­sion, shall be a per­fect exam­ple of how polit­i­cal risks exists in all parts of the world.

Maybe it is also time to reeval­uete our own risk per­cep­tion in that regard. What do you think?

Emre Kara­ca

Cred­it Insur­ance Manager

Finan­cial Lines Specialist

As of March 4th, 2020, there have been 93’574 cases of coronavirus (COVID-19) across 81 countries and territories, with a death toll of 3’204, and increasing. Although these numbers and the linear increase of total case numbers are alarming, there are still reasons to remain optimistic as among the 93’547 infected, 54’406 have already totally recovered from the virus, and within the 39’833 cases that remain, 33’058 are in mild condition.

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