Demand For Flu Outbreak Business Coverage Poised To Rise, Sellers Say

Markel reports that only seven or eight policies have been sold since the product was launched back in 2006 to a target market that includes restaurants, health care providers (ranging from doctors offices and pharmacies to hospitals) and educational facilities.

Barrett Hubbard, managing director of Markel Risk Solutions in Glen Allen, Va., likened the level of demand until recently to the early years of employment practices liability insurance, before the headline sexual harassment cases.

"There was demand, but not overwhelming demand," he recalled.

"This modest outbreak of Swine flu has certainly raised the specter of contagion risk to a new level for insurance buyers. The volume of phone calls across Markel has picked up dramatically over the last 10 days," Mr. Hubbard told NU during a phone interview in early May.

Separately, Tracey Sharis, who manages health care, higher education and financial institution businesses for Lexington Insurance, a Boston-based specialty insurance unit of AIU Holdings, gave an assessment of take-up rates for Pandemic Rx–a business interruption endorsement to commercial property policies for acute care medical facilities that reimburses lost income and extra expense incurred during a flu pandemic.

"We've seen very consistent demand since the product was released," Ms. Sharis said, noting that 10 percent of Lexington's health care insureds have purchased the endorsement since last year's July product launch.

"The last three-to-four weeks have been very busy for us with regard to answering questions about what the coverage is, and also insureds looking for quotes on the endorsement," she said last week.

Ms. Roth believes the Swine flu outbreak isn't the only event driving a higher level of interest in the Markel product.

"January 1 changed everything–2009 has been the year of contagious events," she said, noting that salmonella outbreaks linked to distribution of peanut butter and pistachio nuts, and now fears about the H1N1 virus together have been a "wake-up call" to potential coverage buyers.

They are no longer just "kicking the tires. People are actually seriously buying it," she reported, while pointing out that jumps in inquiries and sales are particularly noteworthy given the state of the economy. Businesses "are actually looking at this as a coverage that they should budget for or figure out a way to be able to afford," she said.

While the more obvious direct result of peanut butter and pistachio recalls has been a spike in the submissions for product recall and product contamination insurance products–which S.H. Smith also places on behalf of specialty carriers like AIU, Catlin, XL and Liberty–the spread of food-borne bacteria raised awareness about what a contaminating event can do to a business.

"The peanut recall affected 2,100 businesses that were using the peanut butter paste from the peanut company [supplier that was shut down], and not just small businesses. We're talking about on a national scale, very large corporations and large food manufacturers and retailers that had that product on their shelves," Ms. Roth said, noting that even Ben & Jerry's had to pull their ice cream off the shelves as a proactive measure.

"All of a sudden, everyone's wheels start turning. It doesn't have a direct impact or correlation to the [outbreak] coverage, but people start thinking [about the potential business implications]. It got the ball rolling," she said.

In addition, if the surge in inquiries about product recall and contamination insurance is any indication of things to come for the income loss insurance products responding to disease outbreak triggers, Ms. Roth's experience on that front may be telling.

"I'd work on maybe a dozen recall policies a year" through last year, she said. "Now, in the last three months, my office has seen close to a dozen a month," she added, noting that submissions recently have spiked to more like a dozen in a week.

COVERAGES EXPLAINED

In addition to flu outbreaks, Markel's Outbreak Coverage responds to the business impacts of contagions arising from bacteria like salmonella and e-coli (which trigger food-borne illnesses) and an extensive list of other specific covered contagions–diseases like meningitis, mononucleosis, MRSA (an antibiotic resistant skin infection) and SARS (Severe Acute Respiratory Syndrome).

The policy, however, is not triggered unless a business location is actually shut down. Therefore, an entity like Ben & Jerry's in Ms. Roth's example would not be covered for lost business income since the business did close.

In addition, Markel's policy will respond only if a public health official orders a specific insured building or operation to close, Mr. Hubbard said. He explained that contagions are not entirely fortuitous like other events covered by insurance, prompting the need to have this coverage triggered by an authority who acts independently from the insured.

Covered contagions and public health officials are broadly defined in the policy, he said, noting that the latter can include anyone from local county officials to officials of the Department of Agriculture.

Explaining the last component of a triple-coverage trigger of Markel's Outbreak Coverage, Mr. Hubbard and Ms. Roth said the disease or bacteria prompting the closure must "be on your premises."

That aspect of the coverage trigger is one people often miss, Mr. Hubbard said. "It can't be something down the street…and they decide to close you," he noted.

Mr. Hubbard also explained that unlike a traditional business interruption policy, Markel's policyholders are not required to provide numerical details of their economic losses to the insurer.

"We tried to keep the coverage simple–to avoid contentious business interruption claims, which can be very labor-intensive for both the lawyers and the accountants," he said, explaining that the policy pays a selected per-day limit ranging from $2,500 per day up to $50,000 per day per location for a maximum of 30 days.

"We felt the real purpose of this was [to provide] a bridge to get [insureds] through, not…to indemnify them to get them back to their original spot," he said, adding that insureds use the per-day amount at their discretion for whatever extra expenses they choose, such as public relations costs, decontamination expenses or costs to continuing paying employees, for example.

Ms. Roth highlighted this particular feature as one that agents and insureds don't fully appreciate. "They don't comprehend that this could just basically pay for anything. Once you have the policy, as long as the trigger is met, it provides you with a payout. People don't understand that. They expect that…you then have to justify the expenses of the claim" to the carrier.

"This is in fact a business interruption coverage that truly gives you a per-diem amount," she said, suggesting that the inability of insureds to understand the uniqueness of the policy feature has contributed to making its introduction a very slow process. "There's a learning curve in understanding how it actually works."

While Lexington's Pandemic Rx is "adjusted no differently than a regular old business interruption" policy, providing for up to six months of income loss during a pandemic flu event, unlike Markel's policy, an actual interruption in business activity is not required to trigger coverage.

Ms. Sharis explained that the financial strain on health care providers during a pandemic is not caused by a shutdown, but instead by a spike in hospital admissions. An influx of patients seeking flu treatment can result in the cancellation of pricier elective procedures and reduced revenues for the hospitals. "That loss of income is what we pick up" under the policy, she said.

The broad policy trigger is the notice of a public health emergency by any department of public health or health official. "We don't need the WHO [World Health Organization] or the CDC [Centers for Disease Control] or somebody of that very high macro level to release a warning of pandemic emergency to trigger the coverage," she said, noting that even a community level, local health authority can make an announcement that would trigger coverage.

The policy also covers certain extra expenses incurred in providing treatment for flu cases, Ms. Sharis said, noting that reimbursements for preparations made for up to 12 months prior to the outbreak may be covered–"for instance, if a facility stocked up on a vaccine that is related to a specific strain of the flu or equipment that would be needed only to treat some kind of influenza outbreak."

Pandemic Rx also provides expense reimbursement for items like hiring a public relations firm "to restore their brand or take away some of the stigma that might be associated with having become a quarantine facility or a control zone," she said. "We also help with public relations relating to the event itself and making sure word gets out that the hospital may be, in fact, a quarantine center or control zone," she said.

Ms. Sharis said the endorsement, which is sold only alongside a commercial property product (not as a standalone coverage), is available to acute care facilities of all sizes with available limits of up to $50 million. The development of the endorsement grew out of Lexington's "industry vertical approach" to provide an array of products for the health care and higher education segments, including a $1.5 billion limit facility for non-catastrophe property announced in March 2008.

Educational institutions, however, are not eligible for this particular endorsement, she said.

PANDEMICS NOT INSURABLE

While AIU's product is called Pandemic Rx, Markel's Mr. Hubbard was quick to point out that global pandemics are actually not insurable events.

"What insureds wish for, what society wishes for is…the magic bullet"–insurance that will respond "if there is a true global pandemic, a true outbreak of a massive nature," Mr. Hubbard said.

Referring to some U.S. government documents put together back when the Avian flu struck years ago, he said the documents revealed that the economic impact of a pandemic is somewhere between 5 percent and 12 percent of gross domestic product.

"That is a massive, massive number," he said. "There is what insurance can do, and what society will have to do."

For instance, an insurance policy cannot respond to a situation like one in which officials decide they don't want anyone to go into downtown Manhattan for several days to control the spread of disease. "Our policy does not respond to quarantines, or sweeping geographic closures ordered for prophylactic measures," Mr. Hubbard said.

Mr. Hubbard coincidentally spoke to NU on the same day that press services widely reported remarks made by Berkshire Hathaway's Warren Buffett stating that his insurance operations could offer a form of pandemic coverage as Swine flu cases started soaring.

(The statements reported by Reuters and other services suggested that Berkshire's offering would be a form of life insurance or reinsurance–a policy that would be triggered by a U.S. mortality rising by 25 percent in 2010–rather than business interruption.)

Markel hasn't yet paid any claims related to Swine flu–or any claims at all for that matter–but Mr. Hubbard said the policy would respond to some situations schools and other entities recently found themselves in if they had purchased coverage.

A "perfect example" occurred in Hong Kong, when a government health official quarantined a hotel, which had a group of guests who had visited Mexico–one of whom had gotten sick.

"We can pay them because of the fortuitousness of that event. When it becomes a societal event, when it becomes closures that are designed to be voluntary and protective–for that no insurance company could possibly offer the kind of limits everyone would need," he said, referencing reports of Mr. Buffett's remarks with regard to insuring pandemics.

Asked about the example of a high school in Queens, N.Y., which was reportedly closed initially on the actions of the school principal after some students returned from a trip to Mexico and more than 100 students visited the school nurse, Mr. Hubbard confirmed that such a situation would not trigger coverage.

On the other hand, there were some Texas school closures ordered by health officials that would have triggered claims payments had they purchased Markel's policy, he said–noting, however, that the most frequent buyers so far have been restaurants and health care facilities, rather than educational facilities.

UNDERWRITNG THE RISKS

Asked whether Markel would offer cover to any school that came looking for coverage, Mr. Hubbard said, "I think we would use some care based upon what we see with what I'll call relative risk."

He added, however, that "the one beautiful thing about contagion or infectious disease risk is that it pretty much exerts itself equally. [An entity] can take the best precautions to protect itself, but viruses are pretty creative little creatures. They're going to get where they want to go whether we do anything or not."

"So the underwriting of this is really about the numbers, not so much about each risk," he said. "That said, if you look in the restaurant class, we're a little more careful with seafood restaurants than steak houses," he said, adding that Markel might also be slightly more careful with schools that have had a history of outbreaks.

At Lexington, Ms. Sharis said "all risks are considered on an individual-risk basis," making it impossible to make any broad, sweeping statements about underwriting considerations.

Lexington, operating as an excess and surplus lines carrier, does not have filed or admitted rates, and risks are also priced on an account-by-account basis, she said, adding that each insured is required to take a 10 percent quota-share participation in whatever sublimit it selects.

Giving a sense of the cost of Markel's coverage, Mr. Hubbard said a $5,000 per-day limit, providing $150,000 of coverage for the 30-day maximum timeframe, would roughly cost $1,500 for each location.

Ms. Roth noted that the minimum premium is $750, which was the amount paid by the purchaser of the first policy she placed–a zoo worried about Avian flu.

For more information, read Will Other Specialty Policies Be Tapped For Flu Claims?

Policy Highlights

What Do Markel and Lexington Cover?

Markel's Outbreak Extra Expense coverage:

o Provides a per-day limit of expense coverage for a specific insured location closed by a public health official due to a covered contagion on the premises.

o Per-day limits range from $2,500 to $50,000 per day, per location for a maximum of 30 days.

o Targeted classes include restaurants, health care providers (ranging from doctors offices and pharmacies to hospitals) and educational facilities.

o The standalone policy is distributed through Markel wholesale broker partners and retail agents.

Lexington's Pandemic Rx coverage:

o Provides six-months of business income losses, subject to a 10 percent quota-share participation requirement.

o Also covers certain extra expenses, including: the procurement of vaccines, antibiotics and anti-viral medications; consumable resources such as hand hygiene supplies, masks and gloves; crisis response/public relations costs up to $100,000.

o Is sold as an endorsement to a commercial property policy. Property limits of $1.5 billion are available, with endorsement sublimits of up to $50 million.

o Is available for acute care health facilities (hospitals) only.

o Coverage is distributed through licensed surplus lines brokers–wholesale or retail.