Pandemics – Impact on Insurance Companies: History, Implications, and Modeling

1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2007 General Meeting Assemblée générale 2007 Montréal, Québec

2. Pandemics – Where are We? • Definitions and History of Pandemics • Implications of Pandemic for Insurance Companies • Modeling Impact of Pandemics on Insurance Portfolios

3. History of Pandemics History of Pandemics in the 20th century: 1918 Spanish Flu (most severe) Over 40 million deaths in 60 countries 1957 Asian Flu 1 million deaths 1968 Hong Kong (mildest) 700,000 deaths

4. Characteristics of Pandemics The most common characteristics are: The ability to cause illness on a global basis Little or no pre-existing immunity Potential for serious complications Virus is new subtype No vaccines available in the early stages

5. World Health Organization phases of pandemic alert

6. Current Situation Recent Outbreaks SARS: In 2002 SARS infected 8,098 people in 25 countries, 774 deaths Cost to global economy - $40 billion* Transported by air travel *Roche, CDC

7. Avian FluRecent Outbreaks: Avian Flu – Strain H5N1 Characteristics as classified by CDC An influenza pandemic resulting from it Currently little pre-existing immunity to the virus among humans No vaccines are currently available for human use Current status To date, over 281 people infected and 169 deaths Represents a mortality rate of over 60%

8. Avian Flu - Potential Outcomes According to the World Health Organization (WHO) Continued spread via flyways of migrating birds North America is one of the flyway connections

9. Future Scenario The Future Outlook Epidemiological models from the Centers for Disease Control and Prevention, Atlanta, USA 2 to 7.4 Million deaths globally Impact greatest in low income countries High income countries Scientific consensus that: Avian pandemic will sicken 20% of the world Result in absenteeism of 40% of global workplace

10. Future Scenario*Comparing Costs *World Bank and Risk Management Solutions figures

11. Implications of Pandemic for Insurance Companies • Risk is opportunity • Core competency

12. Approach to Planning • Denial or lack of interest in problem • Recognition of problem • Willingness to discuss and prepare • Learn what needs to be done • Implement knowledge learned • Sustained readiness as new normal

13. Risks to Manage • Economic • Business continuity • Claims surge • Reinsurance

14. Risks to Manage- Economic Risks • Global recession is possible • Asset values may decline • Liquidity risk • Estimated 5% drop in GDP

15. Risks to Manage- Business Continuity • Employee absenteeism • Disruption of infrastructure • Transportation • Commerce • Public Safety • Health Care • Communication is key

16. Risks to Manage- Claims Surge • Medical claim payments • Life insurance benefits

17. Risks to Manage- Reinsurance • Capitalization of reinsurance market • Net amounts at risk – direct vs. reinsurance

18. Modeling the Impact of Pandemics on Insurance Portfolios • Help life and health companies manage risk and long term viability • Quantify the potential impact of various pandemic scenarios • Estimate the impact of reinsurance under various scenarios and reinsurance arrangements

19. Financial Impact for Insurance Company • Location of exposure • Net amount at risk • Conservatism of reserves • Product diversification • Liquidity

20. Pandemic Model Structure • Input • Model Assumptions • Scenario Testing • Output • Reinsurance Options

21. Input • Normal Mortality • Exposure Data

22. Input • Normal Mortality • Exposure Data • Age • Health Status • Product

23. Observations –Insured vs. Population • Access to health care • Ability to distance oneself • Effect of underwriting • Employed lives • Educational level • Urban lives • Nonsmokers

24. Model Assumptions • Morbidity • Mortality • Shape of Curve • Duration of Pandemic • Effect of Vaccines • Effect of Antiviral Medications

25. Model Assumption- Morbidity • The attack rate of an influenza virus determines the percent of the population that becomes infected. • Attack rates can vary by age with illness among school age children tending to be highest.

26. Model Assumption-Mortality • The excess deaths resulting from the influenza virus can vary by age and underlying health status.

27. Model Assumption- Shape of Mortality Curve • The excess deaths by age during the 1968 pandemic followed the typical U shaped curve. • The excess deaths by age during the 1957 pandemic were highest at the oldest age brackets.

28. Model Assumption- Shape of Mortality Curve • The excess deaths by age during the 1918 pandemic resembled a truncated W. • Excess deaths by age during a severe modern pandemic would likely resemble a W.

29. Model Assumption- Duration of Pandemic • Pandemic flu outbreak can last several weeks. • Several historic pandemics occurred in waves.

30. Model Assumption- Vaccines • Vaccines impact transmission of disease and therefore impact the rate of infection.

31. Model Assumption- Antiviral Medications • Antiviral medications reduce the mortality associated with influenza.

32. Scenarios • Mild Pandemic (1968 – Hong Kong Flu) • Moderate Pandemic (1957 – Asian Flu) • Severe Pandemic (1918 – Spanish Flu) • Center for Disease Control FluAid Model • Historical Influenza Mortality (1917 – 1994)

33. Modeling the Impact of Pandemic on an Insurance Portfolio

34. Reinsurance Options Abnormal Mortality Stop Loss Known Parameters Pandemic Specific Coverage Historical Parameters

35. Reinsurance Options Stop Loss Covers Straightforward Cover “Reservation” Cover Indexed Mortality Cover

36. Summary • Review of pandemics • Implications for insurance company • Model insurance exposure