- Coronavirus Is Hitting the Cruise Line Industry Hard
- Have the cruise lines learned anything from previous outbreaks—norovirus, for instance? How will the coronavirus affect their business in the next year or so?
- If ships are trying to steer clear of infected areas, how easy is it for cruise lines to rejigger itineraries, vessels, crew, etc., to move to another part of the world?
- Are passengers now hesitant to book a cruise?
- What are best practices in communicating with travelers during times these?
- What do the cruise lines need to do to convince people not to cancel and to continue booking? What should they be doing better?
- Coronavirus Causes Global Business Upheaval – Risk Management
- Global Supply Chain and Business Interruption
- Insurance Implications
- Key Roles for Risk Professionals
Coronavirus Is Hitting the Cruise Line Industry Hard
During the current coronavirus epidemic, cruise ships have become the perfect petri dish that allows the virus to thrive and spread quickly. Why? The vessels’ tight, close-knit quarters and population of international passengers and crew, all with different levels of immunity, are key factors, the BBC reports.
Earlier this month, more than 690 passengers on Carnival Cruise Line’s Diamond Princess were quarantined for two weeks in Yokohama, Japan, after testing positive for the virus, and 4 of them died.
The Westerdam, operated by Holland America, which is owned by Carnival, was denied entry at ports in five different countries after a female passenger was misdiagnosed with the virus. The World Dream (a Genting Hong Kong Ltd.
cruise ship), was held in Hong Kong for four days when passengers who had already disembarked from a previous cruise were found to be infected; no one on that ship ultimately was diagnosed with coronavirus.
These outbreaks have placed the $45 billion cruise line industry in peril, as the virus is forcing companies Royal Caribbean and Carnival to cancel trips and adjust itineraries. The travel industry isn’t the only one affected—on Monday, stocks tumbled globally after reports that coronavirus outbreaks were increasing outside China, reaching South Korea and Italy, among other countries.
The same day, the US State Department urged cruise ship travelers with itineraries to or within Asia to consider canceling their trips.
“This is a dynamic situation and US citizens traveling by ship may be impacted by travel restrictions affecting their itineraries or ability to disembark, or may be subject to quarantine procedures implemented by the local authorities,” the State Department statement reads.
Christopher Muller, a School of Hospitality Administration professor of the practice, is a travel industry expert whose research focuses on corporate and chain restaurant management. He was dean of SHA from 2010 through 2012 and has done training and development work with Costa Cruises and has worked as well as a consultant to the cruise industry.
BU Today spoke to Muller for insights into how cruise lines are dealing with the coronavirus and whether or not he believes they can recover from the financial damage and loss of public trust.
Muller: They expanded their inventory, meaning the number of ships and cabins available. They increased the number of cabins from about four million to five million, thinking business would expand 20 to 30 percent. That’s mostly the Chinese market, using Hong Kong and Macau as bases.
Coronavirus has led to a 15 percent decline in business. Part of it is that people are canceling and just not booking. This is a big setback for the plans to grow.
Outside Asia, last week Richard Branson launched a brand-new cruise line with the ship the Scarlet Lady.
It will start its Caribbean cruises in late March, and two more ships are on the way.
Have the cruise lines learned anything from previous outbreaks—norovirus, for instance? How will the coronavirus affect their business in the next year or so?
In 2013, when Carnival and other lines were affected with norovirus and Legionnaires disease, they learned something.
The fastest way to change public opinion was to go to the next nearest port as soon as there was an infection, with 10 or 12 cases, and pull everyone off the ship and make a big public showing of disinfecting the ship. If you don’t keep people locked up, you keep people from getting infected.
This time around, though, the government did keep people on the ship. In the case of the Diamond Princess, more than 600 people got sick because they were kept on the ship.
There’s a six- to nine-month lag time [following a wide-spread contamination], and then people tend to forget about it.
The industry is selling luxury; a cruise ship is a hotel that floats to different cities safely. Problems can be overcome, and the cruise line usually offers deep discounts and focuses on the fun side of it.
If ships are trying to steer clear of infected areas, how easy is it for cruise lines to rejigger itineraries, vessels, crew, etc., to move to another part of the world?
That’s the joy of those things versus a hotel: if you spend $150 million on a hotel, it’s stuck in one place. A boat can be moved. The ships do move around to broad regions, some will be in the Caribbean, the Mediterranean, Alaska, the West Coast. They can change their ports of call very quickly. In the Caribbean, many are starting to use their own island as one of the stops.
Are passengers now hesitant to book a cruise?
The more news [of the coronavirus] continues, and the more we aren’t sure of the spread as it moves into Europe, it will have an effect.
People are skittish, they don’t want to be in a zombie prison, in close, confined conditions on these ships. Even on luxurious ships, with large, grand public spaces, the cabins are very small, maybe 200 to 230 square feet.
The staterooms aren’t even as big as a room at a Hampton Inn, because they don’t expect you to spend a lot of time in your cabin.
What are best practices in communicating with travelers during times these?
For the people who are prebooked, cruise lines should be sending them lots of information and emails, trying to get them to continue the booking. They should be releasing a lot more ads, TV commercials advertising their ships.
This is the time of the year in the Northeast that cruise lines appeal to people who want a last-minute getaway for a good price.
Add to that the fact that we have had a mild winter, so people aren’t feeling the urge to go to a warm climate as much as in years past, and it’s having an economic impact.
What do the cruise lines need to do to convince people not to cancel and to continue booking? What should they be doing better?
Unfortunately, cruise lines are facing government regulations and restrictions that are counter to everything they have learned about controlling infectious agents.
Until the unfolding pandemic appears to be fully under control, the cruise industry will have a hard story to tell. Not to be alarmist, but expect this to start hurting air traffic next.
If ships seem unsafe, it isn’t a big leap for people to see planes as even more confining.
Coronavirus Causes Global Business Upheaval – Risk Management
In Allianz’s Risk Barometer 2020, 17 yearsafter the SARS outbreak, risk professionals ranked pandemics 17th on their listof top global risks for the year.
Business interruption, including supply chaindisruption, ranked second.
By the end of the first quarter, countless companiesfound themselves squarely at the intersection of these threats, as the novelcoronavirus COVID-19 spread into a global pandemic, leaving worldwide chaos inits wake.
COVID-19 has quickly taken a dramatic toll on the globaleconomy. Around the world, markets have grown extremely volatile, leavingcompanies and consumers a acutely uncertain.
In the United States, theFederal Reserve slashed interest rates in an unexpected emergency cut for thefirst time since 2008, attempting to allay some investor concerns, insteadsending stocks and bonds tumbling further amid recognition of the potentialwidespread vulnerability.
On March 9, the stock market had its single worst daysince the 2008 financial crisis, quickly surpassed by another plunge on March16, in which the Dow Jones Industrial Average dropped more than 12%—itsthird-worst day ever.
With factories shuttered, oil consumption also decreased,and falling demand set off a March price war between Russia and Saudi Arabia.In a single day, prices fell 25% to the lowest point in over 20 years, showingno sign of imminent rebound as both countries instead expressed plans toincrease output to remain competitive.
Businesses are increasingly facing existential risks fromvolatility in the global economy, and on an individual level, they areconfronting business interruption and disruption up and down the supply chain, demonstratingthe extent of interdependencies in modern business and the risks ofoverdependence on key suppliers or regions. Strict quarantines in keymanufacturing hubs began making a significant dent in the global supply chainin January, particularly hitting the manufacturing, automotive, oil/gas, andconsumer products industries. Many mid-sized companies that are struggling toresume operations in China, for example, manufacture component parts, causingan outsized impact on even the largest companies. Companies that do resumeoperations face longtail interruption the longer it takes to ramp back up.
Global Supply Chain and Business Interruption
In a Gartner survey in early March, 56% of the 1,500respondents rated themselves as somewhat prepared for the impact of thecoronavirus, but just 12% said their business was “highly prepared” and 11%admitted they were either relatively or very unprepared.
“Just 2% ofrespondents believe their business can continue as normal, highlighting thehuge range of businesses that could be affected by the outbreak,” Gartnerreported.
“Twenty-four percent of respondents expect little disruption, whilethe majority expect business to continue at a reduced pace (57%), to beseverely restricted (16%) or to be discontinued altogether (1%).”
According to Suki Basi, CEO of risk modeling firm theRussell Group, “What we are seeing in our analysis is that, for corporates,‘the ground zero’ of the coronavirus outbreak is supply chain disruption, asall companies are impacted in one way or another from a slowdown in the Chineseeconomy.”
Even relatively early in the outbreak, companies beganbracing stakeholders for material impacts on business. MarketWatch analystsfound the word “coronavirus” in 38% of transcripts from earnings calls amongthe S&P 500 between January 1 and February 13.
Indeed, in the time since, business interruption and lack ousiness have begun dramatically impacting companies across a wide swath ofindustries.
A week before shutdowns began across the United States, theNational Retail Federation reported on March 9 that 40% of their members hadexperienced disruptions and 26% expected to see them.
While most of itslocations had reopened, Starbucks said in March that January closures in Chinaalone would cause a notable hit to second-quarter earnings, reducing same-storesales by 50% and cutting revenue by up to $430 million.
Both supply chains and consumer demand have impacted thetech and consumer products industries. For example, Apple began warningshareholders in February that disruption and a slower-than-expected transitionback to business among component manufacturers and producers of consumer goodscould reduce worldwide supply of consumer electronics, including iPhones.
The rapid spread of the pandemic has also ravaged the travelindustry. After passengers on multiple Princess Cruises suffered coronavirusoutbreaks and quarantines, shares in parent company Carnival Corp.
plungedalmost 50%, and companies across the cruise industry saw both share prices andbookings plummet by more than 35%, year over year. In early March, theInternational Air Transport Association estimated airline losses could total upto $113 billion, and that was before President Trump restricted travel betweenthe U.S.
and Europe, which could result in the cancellation of another 7,000flights, according to flight data company OAG.
In an effort to contain the pandemic, countries enactedwidespread shutdowns and quarantines, and worldwide exposure to claims forinsurers and reinsurers increased as countless events were cancelled andbusinesses closed.
Fitch Ratings warned that insurance companies will beespecially vulnerable in the coming months both directly via a potential spikein claims and indirectly due to market vulnerability.
Moody’s analystssimilarly noted, “An economic slowdown triggered by the outbreak will crimpbusiness volumes for insurers and also lead to higher claims for certain typesof insurance, including trade credit and event cancellation insurance.”
Few insurers offer commercially available products tospecifically cover pandemic risks. Indeed, Fitch Ratings noted in mid-Marchthat the nature of insured commercial exposures and restrictive policy languageadopted in the wake of the SARS outbreak would ly help limit the impact ofCOVID-19 on U.S. property/casualty insurers.
At the time, the firm did notbelieve carriers would be exposed to enough claims from the pandemicitself to cause material impact onfinancial results. As Marsh explained in the report Outbreaks, Epidemics,and Pandemics: Preparedness and Response Strategies, “Under standardproperty policies, insured physical damage is necessary to trigger a coveredloss.
If the novel coronavirus were to manifest at an insured’s premises,through people becoming ill, insurers could contend that contamination is notphysical damage and also may maintain that possible contamination, proximity toother contaminated premises, or fear on the part of the public do not amount tophysical damage.
Property forms also typically contain ‘contamination’exclusions that insurers may seek to invoke.”
Some insurers have started to see claims come in, thoughwith losses still rapidly mounting, many businesses have simply begun issuingfirst notice in advance of claims.
“Allianz Global Corporate and Specialtycurrently has received some initial claims notifications from companies aroundthe globe,” according to a statement from the insurer, noting approximately 20claims had been filed as of March 9.
“Most of these claims have been notified underbusiness interruption extensions of property policies. Additionally, we areseeing first notifications of event contingency claims.
Loss investigation hasstarted; it is currently being examined whether coverage for communicabledisease exists in the respective wordings.” Allianz would not yet estimate anyfinancial losses, given the continuing and evolving situation.
While many business interruption policies may not cover—oroutright exclude—pandemics, some will ly be triggered by the continuing widespreadsupply chain disruption.
Additionally, some companies with more manuscriptedpolicies or with alternative risk transfer programs such as captives may havesecured coverage for business disruption or loss of customers or revenue.
Allianz’s Alternative Risk Transfer team reported a notable increase ininquiries from corporate clients about such products for pandemic risks.
Other specialized coverage may also kick in. Contractfrustration insurance, for example, may offer some relief for those that havepurchased it. “Countries affected by the spread of infectious disease could seeancillary economic effects, including employee absences or closures of majorports.
This could increase the risk that businesses in these countries cancelcontracts with or default on payments or deliveries to their foreigncounterparties,” Marsh explained.
“Such policies can be designed to covernonpayment, non-delivery or contract cancellation for any reason, including thepotential economic effects of an outbreak.”
According to Willis Towers Watson, trade disruptioninsurance may offer some relief for companies suffering supply chaininterruptions, such as losses related to government-mandated emergency closureof ports and transportation centers, quarantine, confiscation or seizure of aproduct in transit, or embargo on potentially contaminated product. Unstandard business interruption coverage under marine cargo or property forms,the firm noted trade disruption insurance does not require “direct physicalloss to goods or their conveyances.”
Companies that cannot fulfill contracts as a result of supply chain disruption should be looking at force majeure, or “act of God,” provisions in their business contracts, which may offer some relief from contractual obligations.
According to Neil Thomas, head of claims for Asia at Willis Towers Watson, “Clauses and jurisdictions will differ in the consideration and treatment of the situation, but the China Council for Promotion of International Trade is issuing force majeure certificates to Chinese companies recognizing the outbreak as a triggering event, which also appears to be the position of the National People’s Congress.”
Key Roles for Risk Professionals
Looking ahead, risk professionals may need to consider theirstrategies to position corporate risk for renewals, which could proveespecially critical in placing risk amid such volatility.
“The longer theperiod of outbreak, the more ly a pandemic would be active during aninsurance buyer’s renewal time,” Willis Towers Watson advised.
“It is importantto position your risk strategically with underwriters and be aware of changingmarket conditions or exclusions that arise as a result of the outbreak.”
“Risk managers should stay aware of the global situation,monitor health advisories from world health organizations and, mostimportantly, maintain a dynamic business continuity model that addresses theconcerns and wellbeing of the organization’s employees as well its physical andfinancial assets,” the firm added. “These are powerful weapons againstpotentially catastrophic consequences.”
As the pandemic and resulting interruption impact businessesworldwide, risk professionals’ past work will come under additional review ascrisis response and business continuity plans are put to the test.
Riskprofessionals can expect scrutiny of their preparation and response, fromproviding for their employees and communicating with key stakeholders to havingstrong response procedures and enterprise risk programs in place.
For many organizations, one of the key challenges isdetermining when to begin implementing these plans, particularly in the face ofsuch a rapidly evolving risk.
“Organizations often have policies in place to dealwith most risks, but they don’t activate them until it’s too late because noone is owning the risk or taking it seriously until it is fully manifested,”Gartner reported.
“The threshold for a risk to generate executive action isoften too high to enable an effective response.”
Using an impacts-based method can help risk professionalsassess a crisis and determine when response plans are triggered and when to actto mitigate specific effects.
“Also having response plans that react tospecific impacts means it is simpler to communicate the plan to staff, so thatall employees can play a part in managing risk.
In fast-moving situations suchas this, the more people who are owning risk, the more ly it is that anorganizational response will be timely,” the firm noted.
“Avoid constructing elaborate ‘what if?’ scenarios and focuson what is known,” said Matt Shinkman, vice president of Gartner’s risk andaudit practice.
“Many organizations ly already have plans in place to dealwith the types of disruption they are facing because of the coronavirus.
Thejob of risk management is to ensure the right plans exists and make sure theyget used at the appropriate moment.”