Cedric Stephens | Business exposure to COVID unsettled

ADVISORY COLUMN: RISKS & INSURANCE

Raymond Campbell, partner and head of advisory at KPMG, estimated the size of Jamaica’s 12-month loss in tourism earnings post-COVID-19. It ranged from a low of US$437 million to a high of US$1 billion.

These estimates were calculated from base earnings of US$3.77 billion. Expressed differently, he projected that the country’s tourism earnings would fall because of the pandemic between 11.59 per cent and 26.56 per cent.

Campbell’s estimates “do not include the COVID-19 crisis-management period when travel restrictions are in effect and earnings are significantly compromised”.

Those estimates appear overly optimistic when compared with the IMF’s. The Financial Gleaner reported on May 22 that “tourism is projected to fall by more than two-thirds, or by over US$2.12 billion, to US$995 million”, citing data from the Fund. Bottom line: local tourism earnings are expected to fall sharply because of COVID-19, whichever numbers are used.

The entertainment industry will also suffer a big revenue loss. The Minister of Culture, Gender, Entertainment and Sport estimated that the local entertainment industry “has taken a $26 billion hit since it was locked down in March to slow the spread of the novel coronavirus”. She said that all industry segments were affected.

Add to those losses Jamaica’s two international airports in Montego Bay and Kingston. They are owned by the Government but now operate under concession agreements. They will see declines in revenue.

Airports Council International, which called for urgent relief for the aviation industry last month, according to MultiBriefs, said it expects airport revenues to fall by 50 per cent this year as a response to passenger numbers falling by a similar amount. The estimated global loss for 2020: US$97 billion.

“While larger passenger hub airports will see the most significant share of revenue losses thanks to the coronavirus, leading to a daunting road ahead while trying to recover to pre-virus levels, it is the smaller airports, which have lost a larger share of passengers and are left in a more precarious position.”

Last Wednesday, this newspaper reported that horse racing will return to Caymanas Park on June 20. This will be three months after concerns around the coronavirus disease forced the closure and brought the local industry to a standstill on March 21.

Caymanas Park is owned and operated by Supreme Ventures Racing & Entertainment Limited, SVREL. That company is a subsidiary of the publicly owned lottery company, Supreme Ventures. Based on the latter’s first-quarter 2020 report to shareholders, SVREL’s revenue loss can be estimated at $1 billion during the lockdown.

The estimated revenue losses in the tourism and entertainment industries, plus those for the local airport operators and SVREL, are huge. They also share things in common. Few appear to have had any contingency plans or insurance protection to protect themselves against the disruption of their businesses.

Unpredictable events

In the case of SVREL, for example, even though COVID-19 is referred to as a ‘significant event’ in the notes to its financial statements, there is no mention of risk management or business continuity plans (such as GraceKennedy recently reported to its shareholders). Was this a failure of governance?

Meanwhile, the International Olympic Committee is said, according to news reports, to be in discussions with its event cancellation insurers about the postponement of the Tokyo Olympics until 2021, the resulting economic disruption, and a payout.

Isabel Togoh wrote last month in Forbes: “The All England Lawn Tennis Association, which organises the Wimbledon Tennis Tournament, looks set to recoup almost half of its losses from cancelling the event thanks to the US$2 million pandemic insurance it has taken out every year for the last 17 years.”

Wimbledon, which was scheduled for June 29 to July 12, was cancelled for the first time since World War II because of the coronavirus pandemic, she wrote.

“But according to Action Network sports business reporter Darren Rovell, the organisers are set to receive a US$141 million pay-out thanks to the coronavirus pandemic insurance policy it has paid a total of US$34 million for over the last 17 years.

“Ahead of the cancellation, German Tennis Federation Vice -President Dick Horsdorff told Sky Sports in Germany at the end of March: 'Wimbledon was probably … predictive enough to insure itself against a worldwide pandemic so that the financial damage should be minimised there’.”

AELTC is a 133-year-old institution. Its risk and finance subcommittee's mission is to assess possible disruptions and advise the club’s board about measures to mitigate those risks. Are there any lessons to be learned by members of Jamaica’s entertainment industry and the directors of SVREL?

There are opinions that the local debate about COVID-19-induced business disruptions that was started by South St Catherine MP Fitz A. Jackson on April 29 (see my May 10 column) has ended. This is surprising. The headline clearly stated that the matter was unsettled. The outcome is still in doubt.

In Europe, one insurer was recently ordered by a Paris court to compensate a restaurant owner for two months of virus-related losses. While the firm will appeal, its initial defeat will influence business-interruption claims across the globe, Bloomberg Intelligence analyst Sarah Jane Mahmud wrote.

If the insurer loses the appeal, it could influence the actions of some of the few local businesses that bought business-interruption insurance in the tourism sector. They could file claims given the magnitude of the losses that were suffered during the lockdown period.

Lloyd’s of London, the world’s largest insurance exchange, puts its share of disputed business interruption claims from COVID-19 at US$200 billion. There is still a lot of dust to settle.

Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to aegis@flowja.com.