Welcome to the era of the 'sudden stop'.
As the world takes all sorts of measures to contain the coronavirus outbreak, a friend told me his young children are sitting at home while he and his wife take it in turns to take days off work to look after them. Meanwhile, a candid WhatsApp message informs me that more and more public events are being cancelled and people are panicked. And there’s much talk of tightening of belts.
In economic terms, a sudden stop is characterised by swift reversals of international capital flows, declines in production and consumption and corrections in asset prices — all of which is happening around us. To quote a banker in a 1995 paper authored by economist Rudiger Dornbuschm, “it is not speed that kills, it is the sudden stop". This is applicable to economies and individuals alike.
A sudden stop can strike anyone at any time. Just look at what has happened in Italy — the whole country, 60 million people, are now under quarantine.
Coronavirus is certainly the cause of Italy's shutdown, but it can be caused by anything. Someone I know has a significant neck injury from a fall a couple of weeks ago. He has cleared his diary for several weeks while he rebuilds his ability to function.
Think what would happen if you had to stop everything suddenly and couldn’t earn.
It could be because a global recession, job loss, an accident or illness — something that takes you out for an extended period.
None of this is far-fetched. The Organisation for Economic Co-operation and Development is warning coronavirus could halve global growth. The World Health Organisation says this is "unchartered territory".
People, governments, businesses — everyone is being affected by the virus — even if not directly.
Nouriel Roubini — dubbed "Dr Doom" for his prediction of the 2008 global economic crisis — has been warning of a global recession, alongside many other economists of note.
Following the steep stock market declines this week, Mohamed El-Erian, currently the Allianz chief economic adviser, says: “I don’t think we have made the lows yet, but it’s going to be incredibly choppy.” This in reference to the latest stock market behaviour.
He advocates not buying stocks — stating that this time "it is different" — we don’t know where the bottom could be.
Back to the sudden stop. What can we mere mortals do to lesson the impact — besides stocking up on tinned food, and chocolate (the item of choice for my 13-year-old)?
We’ve had directives from the Central Bank of the UAE and the Ministry of Health and Prevention that aim to help people caught up in this. Measures include banks rescheduling loan agreements or offering payment holidays for those affected by the virus. Meanwhile, suspected or confirmed cases of Covid-19 should be treated as emergencies free of cost, regardless of what insurance cover the patient has.
Insurance and savings are two key personal finance goals to have in place, but what if you can’t pay the premium to keep up insurance payments while you’re ill or out of work?
One solution could be income protection. Policies vary in terms of how much of your income they will cover, and how long for. But, again, there’s the clincher that there’s likely a period of time before the initial payment is made; it could be weeks, or a year between when you claim and when you receive payment. So how do you survive and pay your bills during this stretch?
You could negotiate a policy that allows you to backdate your payouts to the moment you were unable to work (overruling the usual deferred period). But you must continue to pay for your policy no matter what, unless you build in a premium waiver. This means that you won't have to pay your policy premiums during periods when the income protection policy is paying you benefits.
The key takeaways from all of this are:
• This is a Do-It-Yourself moment
Figure out what you need to get by, and put things in place yourself.
• Consider taking out income protection
Find out how long a gap you’ll have to fund your life for before a policy starts paying out, and make sure you have at least that time covered by your emergency savings fund.
If you’re self-employed, policies are more difficult and expensive to come by.
A 2016 study by Zurich found that only 25 per cent of UAE respondents had insurance to protect their income should they become ill or disabled. Nearly 20 per cent had coverage in case of premature death. Almost three-quarters were covered by their employer, so what happens if they no longer work there?
The most common reason respondents gave for having insurance was the fact their employer had offered it to them as a benefit. So the majority of this minority of insured residents are protected because it was offered, not because it was a thought-through decision.
What about you?
Has your business and life been affected by coronavirus? The answer is yes. Are you vulnerable to a ‘sudden stop’? Yes. Have you got plans in place so your life doesn’t explode? I hope so.