# Communicable diseases: Vaccinating the industry

Jeremy Golden highlights the growing problem worldwide of infectious diseases and how it will affect the outlook of reinsurance.

On 11 June 2009, Dr Margaret Chan, director-general of the World Health Organization (WHO), delivered a sombre and alarming statement on public health to the global media.

In the report, World now at the start of 2009 influenza pandemic, Dr Chan explains: "This particular H1N1 strain has not circulated previously in humans. The virus is entirely new. The virus is contagious, spreading easily from one person to another and from one country to another. Spread in several countries can no longer be traced to clearly defined chains of human-to-human transmission. Further spread is considered inevitable."

Exactly 14 months later, WHO declared that the new H1N1 virus has largely run its course and that we are now moving into the post-pandemic period. According to the latest data, more than 214 countries and territories reported cases of H1N1 and more than 18,300 laboratory-confirmed deaths occurred; this number seems low compared to the 36,000 estimated annual deaths from seasonal flu in the US.

The H1N1, or swine flu, pandemic was far less serious than initial projections when many feared the world was facing an unstoppable disease of unknown severity. A particularly worrying trend was the higher-than-average death toll in young and otherwise healthy people.

According to AIR Principal Research Analyst Nita Madhav in a recently published report, The H1N1 Influenza Pandemic: Implications for Catastrophe Modelling: "The 2009 H1N1 pandemic illustrates the uncertainty in pandemic and infectious disease risk for insurers and reinsurers. While the H1N1 experience has not caused extreme insurance losses to date, the next pandemic might have a different outcome. H1N1 has, however, increased demand for pandemic-related (re)insurance solutions."

Future threat
The broad consensus among the vast number of industry reports published post-crisis indicate a high degree of probability that the next pandemic strain of influenza will be significantly more virulent, albeit the probability of an event occurring in any particular year is low at around one in 30.

In addition to influenza, there are other emerging infectious diseases that have occurred; the past few decades have seen outbreaks of diseases previously unknown to medical science such as SARS, HIV and Ebola hemorrhagic fever.

In the assessment of the Lloyd's Emerging Risks Teams, director of franchise performance Rolf Tolle summarises: "Many classes of business will be affected by a pandemic. Clear-cut cases include life and health insurance.

"General economic and societal effects might give rise to secondary forms of loss, particularly if there is a reduction in the efficiency of the emergency services. Those leading such essential national services are taking significant steps to plan for and avoid this; nevertheless as part of sensitivity planning, insurers should consider scenarios where such plans are not 100% effective."

As the level of insurance exposure to losses from pandemic and infectious disease increases, (re)insurers are becoming more dependent on catastrophe modelling.

The RMS Pandemic Influenza Model, developed to estimate the spread and overall impact of pandemic influenza and other infectious diseases, was apparently used both as a framework to understand the unfolding events and as a guide to the likely progression of the swine flu pandemic. RMS says: "The virus' transmission validated the approach of susceptible-infected-recovered (SIR) modelling and the various interventions and attempts to combat the disease had the expected impacts."

Leading life and health insurers and reinsurers, while reporting manageable losses from swine flu, have begun to respond to the potential threat of future catastrophic losses from pandemics by testing the depth and flexibility of capital markets to provide a robust alternative to traditional reinsurance.

Market test
Late last year, Swiss Re sold $75m in mortality bonds protecting against H1N1 pandemic or a terrorist attack. The bonds protect against increased costs from a severe increase in deaths in the US and UK until 2014, with investors earning 6.17% over benchmark rates. Scor extended a mortality swap transaction with investment bank JP Morgan, securing up to$75m in coverage in the case of pandemics. The current level of coverage provided by such bonds, however, is much lower than the life insurance industry's level of exposure.

Multinational brokers led by Aon and some Lloyd's syndicates have also been expanding the range of pandemic and infectious disease cover to allow companies to insure themselves for costs incurred if their building or the vicinity is officially closed due to a pandemic; there is now available a standalone insurance policy to reimburse companies for wages, fixed costs and extra expenses if they are unable to access their buildings.

Similarly in the US, the Hays Company of Illinois has offered pandemic-specific business interruption (BI) coverage since 2008.

These products have been developed to fill a gap in most BI policies, which traditionally require physical damage to a location before a payout is triggered and are typically targeted at large, generally well-insured industries such as education, manufacturing, hospitality and healthcare. The demand for these offerings has increased significantly in the course of the H1N1 influenza pandemic.

Lloyd's has highlighted other classes that could have exposure to pandemics or infectious diseases, among them directors' and officers', general liability, medical malpractice and event cancellation.

Corporations are becoming much more aware of this kind of exposure and will increasingly want to inoculate themselves successfully if they are to stay healthy.