The recent outbreak of the coronavirus, and the alarming rate at which the virus is spreading, is having a global impact. Among the affected entities are American colleges and universities, especially those that enroll large numbers of students from the countries most impacted by the coronavirus outbreak. Recent restrictions announced by the United States on travelers from China could limit those educational institutions’ ability to retain and recruit students from that country, which has recently become a major revenue source.
Faced with potential losses, such institutions will look for ways to guard against the risk of lost tuition revenue. An emerging form of insurance may be one of them.
It should come as no surprise that, just like any other businesses, colleges and universities purchase multiple forms of insurance to guard against various risks. Coverage needs range widely: bodily injuries and property damage, employment-practices liability, medical malpractice, and many other areas. In recent years, however, one university, the University of Illinois, has obtained insurance to guard against a unique risk — that of decreased enrollment of international students. The coronavirus may spur greater attention to this insurance option.
Between 2005 and 2015, the number of first-year international undergraduate students enrolling in American colleges and universities nearly doubled. Almost one-third of those international students came from the People’s Republic of China. In addition to increasing diversity, international students bring a distinct financial advantage: colleges and universities may charge them out-of-state tuition. International students often pay at least 50 percent more than what in-state students pay in tuition rates.
Even before the recent coronavirus outbreak, however, the number of international enrollments had begun to drop. New international undergraduate student enrollments fell 6.3 percent from 2016-17 to 2017-18, while new international graduate school enrollments fell 5.5 percent during the same time period. Possible explanations for the drop include the current political climate in the United States, higher costs at American colleges and universities, and increased educational options outside the country.
Whatever the reasons for the drop in international enrollment, institutions have begun looking for ways to protect themselves from the lost revenue. The University of Illinois, for example, enrolls a large number of Chinese students throughout its various programs, and concerns over a drop in enrollment resulting from a potential trade war with China led it to purchase an insurance policy to guard against this risk. The policy could pay out upward of $60 million, depending on the decline in Chinese student revenue over a three-year period (ending in May 2020) and is costing the institution approximately $425,000 in premiums per year.
Under the terms of the policy, the university shall be indemnified for losses of certain tuition revenue provided that two triggering events occur. First, it must demonstrate a loss of annual tuition revenue in excess of 18.75 percent of the tuition revenue received in the previous year from students from the China or Hong Kong. Second, the loss in revenue must have been caused “solely and directly” by one or more of the following insured events:
- A verified travel warning or alert issued by the United States, China or Hong Kong advising against travel to the United States due to terrorism, political violence, war or pandemic;
- Visa restrictions issued by the United States, China or Hong Kong that prevent students from China or Hong Kong from studying in the United States; or
- Comprehensive sanctions, which are defined as “the unilateral or multilateral deliberate government-imposed withdrawal of customary trade, economic or financial relations between the United States of America and [China or Hong Kong].”
Interestingly, while the loss of revenue must be the result of one of these insured events, the policy states that any of them are presumed to be the cause of the lost revenue and the insurer has the burden of proving otherwise. Additionally, while the policy is only triggered if the university suffers a covered tuition loss that exceeds 18.75 percent of the previous year’s revenue, if covered, the university is entitled to the entire loss and not just the portion of the loss that exceeds 18.75 percent.
The coronavirus has not yet triggered the policy’s coverage. Even though the United States has announced some travel restrictions stemming from the outbreak of the virus, as of March 2, 2020, neither the World Health Organization nor any other federal agency has declared the outbreak a pandemic or epidemic as required by the policy. But this is a developing situation, and some experts have predicted it is only a matter of time before the virus is declared a pandemic, which could partially trigger coverage under the policy (subject to the threshold tuition loss that is also required).
The university’s policy is believed to be the first of its kind. It remains to be seen whether other colleges and universities will look to purchase similar policies to guard against decreased international enrollments. While smaller, lesser-known institutions are likely to be at greater risk since larger ones will probably still be able to get international students even if overall enrollments drop, they may not have the resources to purchase such policies. Moreover, for smaller institutions, it is not simply a question of accepting the next in-state applicant in line in lieu of an international student. While that might allow the institution to maintain its enrollment levels, the much higher tuition rates typically paid by international students means it will still likely suffer financial loses.
But it’s not just decreased international student enrollment at play. Colleges and universities might look to insure against the risk of decreased enrollment in general. According to numerous studies, enrollment at postsecondary institutions has been decreasing for the past eight years. Nearly 300,000 fewer students were enrolled in these institutions this past spring, compared to one year earlier.
For all colleges and universities, a drop in the United States birth rate is one of many factors contributing to decreased enrollment and suggests that the drop has likely not hit rock bottom. Experts point to the Great Recession as the culprit — between 2008 and 2013, approximately 2.3 million fewer babies were born in the United States than would have been expected absent the recession. As these are the children who would have been attending colleges or universities at the end of the next decade, it is quite possible that the decline in enrollment will continue for many years.
Faced with such decreased enrollments (and thus decreased revenues), colleges and universities may look to insurance in their risk assessments. However, with every type of insurance comes questions of coverage that will depend on the terms and conditions of the policy. In looking at available coverage, institutions need to be cognizant not only about the amount of coverage they need (and how much that will cost) but, perhaps more important, the circumstances under which the policy’s coverage will be triggered. In other words, under what circumstances will the insurer be required to provide coverage? These are the particulars to which institutions of higher learning must be very attentive as they manage their risk.
Michael Rush is of counsel at Gilbert LLP. Click here to read his full biography.