In our connected world, a disease pandemic could create chaos on an unprecedented scale. Trevor Maynard, Lloyd’s emerging risks manager, takes 60 seconds to explain why all businesses, especially insurers, need to think the unthinkable.
Would a pandemic be a catastrophe for insurers?
A major pandemic is a potential catastrophe for the world: it could cause a major recession and possibly tens of millions of deaths. Like other businesses insurers would be affected both operationally (due to staff illness and deaths and the long term emotional impacts this would bring) and from their core business.
Insurers are used to dealing with probabilities: how likely is a pandemic?
There have been pandemics throughout history, around every 30-50 years. Most agree that the last ‘flu pandemic was in 1968. Past pandemics vary in their impact from high hundreds of thousands to tens of millions dead. However the severity and impact is very uncertain. Some pandemics have affected the young and old; others have targeted those of working age.
Can experts forecast its likely impact, in terms of how many people are likely to become ill or die?
At a recent seminar hosted by Lloyd's and XL, Professor Lindsey Davies from the Department of Health said that it was not possible to forecast this risk. She noted that there was high uncertainty in all respects: the timing, the number of people becoming ill and the number dying once sick (case fatality).
In the 1918 ‘flu pandemic, case fatality was 2.5% which led to many tens of millions of deaths.
The current case fatality rate of the bird ‘flu H5N1 is worryingly high at over 50% - though it may be over estimated if weaker cases of H5N1 are not reported. The range of outcomes is clearly very large.
We hear a lot about bird ‘flu: is that the most likely source of a pandemic?
At this time this may be the most likely source. But it is far from certain and there are many other possible sources. The National Institute of Allergy and Infectious Diseases lists a range of new viruses from H7N2 to H10N7 that have had human impact since 2000. SARS (2003) was not influenza at all, but was a new mutation of coronavirus with extreme impacts.
Why can’t we be inoculated against pandemic type viruses?
Until a new virus has emerged there are so many unknowns that a vaccine can’t be made. It takes several months to isolate the virus and prepare a vaccine, so it won’t be available to fight the first wave of pandemic.
Antivirals can have adverse side effects if used over long periods and are not recommended as a prophylactic. However, once a virus has been diagnosed in a patient antivirals can substantially reduce the risk of death. When combined with other common sense measures, like staying a home if sick, antivirals can reduce the spread of disease, buying time for vaccines to be developed.
Which lines of insurance will be hit directly by losses related to a pandemic?
The life and health insurers will be directly impacted. Some lines of general insurance business are also likely to be affected. For example a major pandemic will impact the world’s economy, possibly leading to insolvencies among companies and claims on credit insurance policies. Cancellation cover may be triggered for events around the world simultaneously; some parts of travel insurance policies may be triggered, for example covering medical costs abroad, or covering losses if the traveller or their family become ill.
If causality could be proved general liability, D&O, medical malpractice and PI claims may result if those with a “duty of care” did not adequately plan, particularly if they stand out from their peers.
Are there other, less immediately obvious classes/lines that could be hit by a pandemic?
Whilst the police and fire services have planned ahead to keep a full service in the event of pandemic, insurers should consider what would happen if this is not successful. If crime rises then insurers may be hit; if the fire brigade is unable to offer a complete service then fires may be more severe. A lack of available construction workers (either through illness or absence) may cause delays to repairs and an increase in prices leading to higher claims costs than normal. Fraud may be more prevalent as economically affected people or business attempt to recoup some of their losses.
Should insurers themselves be prepared for business continuity issues?
They certainly should! Insurance is a people business and all companies should have a business continuity plan that addresses pandemic risks. The plan should recognise that pandemic risk is not the same as ordinary crises which often appear suddenly, are contained to one location and may be dealt with relatively quickly. Though pandemics may have some warning they have lasting effects including significant loss of mobility for staff, rendering secondary business sites impotent and requiring considerable home working.
