The return-to-work BI policies are aimed at supporting the resumption of production and work within the Chinese economy

The recent launch, at the direction of the Chinese government, of insurance policies to cover Chinese enterprises against losses due to business interruption (BI) from the coronavirus outbreak could undermine the stability of property and casualty insurers, Fitch Ratings says.

This is because of the limited data available to actuarially price these products at an adequate level, and the speed at which these products are being brought to the market. The policies are aimed at supporting the resumption of production and work within the Chinese economy after a lockdown to contain the spread of the coronavirus.

However, these return-to-work (RTW) insurance products are unlikely to cause material systemic risks to the non-life insurance sector due to limits on the scope and eligibility of the product coverage.

The features of the insurance vary by product and region, but they mainly provide coverage against two kinds of risks - liability for an employee’s illness and death, and risks related to business interruption associated with property shutdowns due to infection. Insured losses mainly cover quarantine costs, staff salaries, housing rental, cash flow disruptions and refinancing difficulties caused by the shutdown. RTW insurance products are largely offered to industries or sectors that the local governments have prioritised for aid.

Fitch believes the pricing adequacy of the RTW insurance associated with COVID-19 remains highly uncertain as the pandemic is still developing domestically and globally. A limited record of reliable and accurate historical data points poses a challenge for insurers to price the products accurately.

Still, the approach used to design or sell these products may limit the overall insured losses that the sector needs to absorb. There are maximum limits that each insured enterprise can claim if the infection occurs after employees return to work. Products offered in some regions impose a cap on the maximum number of insured policies that insurers can offer, limiting their overall risk exposure.

In addition, not all entities are automatically eligible for the RTW coverage because approval from the authorities is necessary for some insurance schemes. Some of the products also impose limits on the duration of coverage. Insurers typically underwrite RTW insurance products through co-insurance by sharing risks with a portfolio of domestic non-life insurers. Some schemes also specify a ceiling on the amount that an individual insurer needs to pay.

The majority of Chinese enterprises did not take up business-interruption insurance coverage before the outbreak when they purchased commercial property insurance partially due to availability and affordability issues. These products also generally contained an exclusion clause for epidemics, depending on the terms of each policy’s coverage. As a result, coronavirus-related claims will not be significant for Chinese property and casualty insurers on these earlier policies.

The Insurance Association of China said claim payments related to COVID-19 amounted to CNY123m as of 10 April 2020. Business from commercial properties only contributed about 3.6% of total non-life insurance premiums in 2019.

Fitch believes demand for RTW insurance products is likely to persist in the short term as the coronavirus outbreak is still ongoing. China’s banking and insurance regulator said 68 Chinese insurers have introduced coronavirus-related products since the start of the outbreak in late 2019. Many production plants, factories, offices, and shops were locked down because of the rapid spread of the pandemic across the nation. The Chinese government has eased restrictions on travel and allowed factories and stores to reopen amid a decline in infections in March.

The majority of these RTW insurance products or schemes are initiated by municipal or provincial governments, which subsidise a material portion of the premiums to enhance the affordability of these products. The subsidies range from 50% to 70% of the premiums paid to insurers when enterprises voluntarily buy the RTW insurance products.