Leading providers want to reduce their exposure in the wake of huge payouts, and Hong Kong firms will pay the price Hong Kong firms will need to pay substantially more for insurance cover for Sars and other infectious diseases as leading reinsurance providers reduce their exposure to future outbreaks from January. This follows a decision by the world's largest reinsurance provider - Munich Re Group - to scale down its Sars cover as the renewal dates of reinsurance contracts loom. The expected insurance payout for Sars in Hong Kong may eclipse the $290.91 million in benefits paid for damage caused by Typhoon York in 1999. To date, insurance companies have paid $230 million to cover Sars-related business losses and medical and death benefits. Andrew Duxbury, chief executive of Munich Re's Hong Kong branch, said it would hold talks with direct insurance companies on the terms of the new contracts in the next few weeks. Mr Duxbury said protection from Sars and other infectious diseases would not be withdrawn, but that new contracts would carry restrictions. Reinsurance companies have an important role in determining the price of policies and availability of cover as they share the risks with direct insurance companies. Reinsurers charge an annual risk-sharing fee every January. Without sharing the risks, many direct insurance firms would not be able to provide policies, while those that can would have to charge customers higher fees. At present, most 'business interruption' policies do not exclude infectious diseases. Mr Duxbury said the new contract would restrict payment to certain types of diseases and would include conditions such as the time and place of the outbreak. On employee compensation, he said Munich Re would adopt the principle of 'one person, one event'. This would mean the direct insurer paid a certain amount to each policyholder and the reinsurer paid the excess. This would substantially limit payouts by reinsurance companies, while direct insurance companies would face higher risks and may have to charge their customers more. 'The modern way of living and more frequent travel mean infectious diseases could easily lead to global health crises,' Mr Duxbury said. 'Sars may come back tomorrow or any other diseases may come at any time. There is no way for the insurance sector to know how to calculate the risks and we simply don't know how much money we would need to pay for future outbreaks. As a result, we can only reduce our exposure in the area.' Last week, luxury hotel operator Mandarin Oriental International received an additional insurance payment of US$13.5 million for damage to business caused by Sars, bringing the total settlement to US$16 million. In addition, Hong Kong insurance companies paid HK$105.28 million for death claims and medical expenses relating to Sars, bringing the total payout so far to $230.08 million. Mr Duxbury said Sars was set to bypass Typhoon York as other hotel operators including Shangri-La Asia and Hongkong & Shanghai Hotels sought to recoup their losses. Some families of the Sars victims may also seek claims from the hospitals, prompting potential payouts of professional indemnity insurance. The cancellation of the Rolling Stones concert in April due to Sars also led to insurance claims. Insurance Commissioner Benjamin Tang Kwok-bun said he had noted the decision of Munich Re and understood some other reinsurance companies were making similar moves. However, he said it was too early for the government to intervene. 'The reinsurance companies have not completely withdrawn Sars cover; they are only limiting their exposure,' Mr Tang said. 'The government believes some insurance companies would still be able to provide cover for Sars and other infectious diseases at a higher cost. The government should not compete with the private sector.' Two years ago, the government set up a $10 billion credit facility to provide insurance cover for employees' compensation in the event of a terrorist attack in the wake of September 11, 2001. 'Terrorist attacks are unexpected. In the case of Sars and other infectious diseases, there are ways of knowing what is going to happen and what can be done to prevent them. As a result, we believe there will still be some insurers willing to provide cover for the outbreak of disease without the need for the government to intervene,' Mr Tang said. He said the insurance industry body - the Hong Kong Federation of Insurers - had set up a taskforce to negotiate with Munich Re and other reinsurers in an attempt to persuade the reinsurance firms to provide a wide scope of cover. Mr Tang said he believed one possible solution would be the exclusion of high-risk groups, such as medical staff, from coverage. In the event of that happening, he said the government would have to provide insurance coverage for Hospital Authority staff.