Parametric Insurance Could Offer Hotels Relief from Coronavirus Cancellations

Organizers of events called off because of the coronavirus are likely to miss out on insurance payouts because typical policies do not cover epidemic outbreaks. Hotels hit by cancellations may fare better.

That is because a new type of insurance launched by Lloyd’s of London just last year offers hotels compensation when revenue per available room – a key metric for the industry – drops below a certain level because of factors they could not predict or control.

Insurance experts Reuters has interviewed say such policies define an insured event as a case when actual results diverge from forecasts because of unforeseen circumstances and the virus outbreak fits those criteria.

None of the insurers involved would offer details on demand for the product and major hotel groups declined to discuss their insurance coverage.

But the backing of some of Lloyd’s largest insurers suggest it has been offered widely, potentially providing some respite to an industry, insurance experts say.

Data from STR, analytics specialist that runs a benchmarking platform for over 68,000 registered chains, groups and individual properties shows revenue in mainland China fell 21.2% in January from a year earlier and 35.5% in Wuhan, where the outbreak started.

Hong Kong, San Francisco, New York and Thailand also saw declines.

“We have seen a decline in performance across a number of markets because of the coronavirus,” Thomas Emanuel, STR director, told Reuters.

Hyatt Hotels has extended waivers on cancellations and changes in bookings for travelers in several countries. Marriott has said it expects a roughly $25 million hit to its monthly fee revenue, while IHG has also seen cancellations.

Three hotel groups contacted by Reuters declined to comment, while two others did not respond.

Insurers and hotels rely on STR data to trigger a payout when the revenue per available room parameter’s drop reaches a certain level as decided in individual policies and because of any unforeseen event.

Parametric Shift

Such “parametric insurance” debuted in the 1990s with a focus on natural disasters, typically in emerging markets. Increasingly, however, the insurance industry has been applying the model to risks once deemed un-insurable.

In this case, payments get triggered when cancellations caused by the outbreak push the revenue gauge below an agreed level.

The new hotel product is led by Tokyo Marine Kiln (TMK) and underwritten by Chaucer, Munich Re Syndicate, Beazley, Faraday and AXIS.

Rather than cover only certain specified events, it allows hotels to get compensated for losses caused by contagions, civil disturbances, terror attacks, earthquakes and hurricanes or financial crises, said Thomas Hoad, head of innovation at TMK.

“By moving to a parametric ‘event’, TMK’s market risk insurance policy covers all risks that lead to a decline in an insured hotel’s local market,” he said.

Munich Re and TMK declined to comment on uptake for the policy from hotels, while Faraday, Beazley and Chaucer did not respond to Reuters queries and AXIS could not immediately be reached for comment.

(Reporting by Noor Zainab Hussain in Bengaluru; editing by Anirban Sen and Tomasz Janowski)