Potential for Avian Flu Pandemic Casts a Frightening Shadow Over Insurers
The possibility of a global avian flu outbreak is haunting insurers–property/casualty, life and health–and it appears that there’s not much they can do to mitigate losses prior to a pandemic.
Nevertheless, carriers can take steps to prepare for a viral catastrophe, such as using computer models and underwriting to quantify what lines and regions avian flu would hit hardest. Additionally, arranging additional capacity with reinsurers in the event of a pandemic also can help inoculate, to some extent, against the flu’s financial shock.
But perhaps the most effective tactic is educating policyholders. Working with local, state and federal governments about flu diagnosis, treatment and containment may be insurers’ best hope to avoid a major loss event.
“Most of the policies at risk are already in existence, so it all depends on how bad of a pandemic it is, and the age distribution of claims,” said Steven Weisbart, and economist with the Insurance Information Institute (III). “What can be done now is gathering information, as well as getting information out.”
An unique strain
The nature of a bird flu outbreak presents a frightening scenario for life underwriters in particular. The strain of avian flu that is causing the concern, the H5N1 strain originating from Asia, is expected to affect wide segments of the population–not just the groups that are considered particularly vulnerable to influenza, such as the sick and elderly.
Although the disease has been limited to birds and those in direct contact with infected fowl, scientists fear it will mutate and spread to humans.
What concerns health officials most is a worldwide bird flu pandemic, in which a virus spreads across the globe. There were three influenza pandemics in the 20th century. The most deadly was the 1917-1918 outbreak of Spanish flu that killed 40 million to 50 million people worldwide.
The U.S. Department of Health and Human Services estimates that 1.76 million Americans could die as the result of an avian flu pandemic; the World Health Organization estimates the flu could cause as many as 7.4 million deaths worldwide. Additionally, those numbers could go higher, depending on the virulence of the virus.
Examine your capacity
Weisbart, who is conducting a study on the impact of a flu pandemic on the life insurance industry, says that carriers should start a dialogue with the reinsurers on capacity issues.
“The first thing I would do is try and understand my reserves, and make sure my firm will have access to reinsurance to pay claims,” Weisbart said.
Right now, life reinsurance is concentrated among a few global operators that include Swiss Re and Munich Re, Weisbart noted. American carriers could find themselves behind European carriers for additional capacity to pay claims.
Carriers often approach reinsurers for additional capital, but only during the period when claims could outpace expected payouts.
“In a pandemic year, everyone would need capital,” Weisbart said, in reference to demand for reinsurance. “There would be a huge scramble. It would look like Best Buy on a sale day.”
A spokesman for Munich Re said that although carriers could approach them about capacity, the discussion would be a guessing game. The possible consequences of an outbreak are “a matter of pure speculation,” because there’s no way to estimate the severity of a pandemic.
Still, with the possibility of a high mortality rate, insurers should start planning their response to avian flu and gauge the impact on their balance sheets, said Eric Rasmussen, vice president of risk management at ING Re.
“If you follow through on the possible outcome, individual life would be significantly [affected],” he said. “And among those companies, it really comes down to their geographic spread of business. For example, how much group life did you write in urban areas, [which] could see significant losses?”
Who will be affected?
While Rasmussen says that there is no way to determine if avian flu will disproportionately affect large cities, past experience has shown that to be true.
Additionally, avian flu could affect policyholders normally considered low-risk for flu death: Americans in their youth or middle age who purchase term insurance during their prime working years.
“It all depends on the severity of the pandemic and, if it even gets to the urban centers and if quarantines are implemented and effective,” Rasmussen said. “Either way, it’s better to have a geographic spread of business.”
The impact on insurers also will depend on the type of business written. The property/casualty industry may suffer the most in business interruption claims, according to Standard & Poor’s. Losses would come from business-interruption claims, particularly in tourism.
Term and group life insurers could suffer significant losses compared to whole life insurers, whose policies have a savings component that offsets carrier risk.
Insurers themselves could suffer from an operational standpoint, as they did in the aftermath of the Sept. 11 terrorist attacks, the report said. “Many insurance company employees could be barred from their workplaces at a time when their companies would have much more business to review.”
Timothy Luedtke, a director in KPMG’s actuarial practice, recommended insurers assess their potential financial risk and reinsurance programs, and include those assessments in their enterprise risk management and capital management planning.
Education the best solution
Some insurers have asked catastrophe modeling firms to develop financial scenarios, said Andrew Coburn, vice president of catastrophe research at risk modeling firm Risk Management Solutions.
In research done two years ago, RMS estimated that American insurers would suffer $39 billion losses as the result of a flu pandemic. But the H5N1 virus produces greater mortality and sickness than the initial model; Risk Management is reworking its numbers and expanding its estimates to global insurers.
“We modeled 1918 type flu, where one-third of the population gets sick and it produces a 0.5 percent mortality rate,” Coburn said. “[The avian flu] may be significantly higher than that.” Some estimates are that the avian flu could sicken as many as one-third of adults domestically.
Education may be the most effective measure against huge losses, said the III’s Weisbart. “Get the word out to policyholders on how to prevent and avoid infections and to seek immediate medical treatment,” he said. Such preparations also include insurers working with all levels of government on infection prevention programs.
“I’m encouraged that the industry is pushing to create awareness and prevention programs with the government,” said ING’s Rasmussen. “It’s the best thing that can be done on the front end to mitigate the back end.”
“Insurers should review business continuity plans and assure the ability to continue servicing the insured population while significant portions of the workforce are homebound,” Luedtke added.
This article was reprinted with permission from KPMG’s Insurance Insider. Copyright 2005 KPMG LLP. All rights reserved. Disclaimer from KPMG: All information provided is of a general nature and is not intended to address the circumstances of any particular individual or entity.