Avian Flu

Remember a couple of years ago, when there was a ton of media hype over the looming threat of Bird Flu?   We don’t hear much about it, probably because the pandemic didn’t manifest as quickly as the media would have liked, and their attention was diverted to other, more sensational topics.

It’s a shame that society seems to have developed such a short attention span.

Consider, for example, this story at CNN:

The AIDS virus has been circulating among people for about 100 years, decades longer than scientists had thought, a new study suggests.

Genetic analysis pushes the estimated origin of HIV back to between 1884 and 1924, with a more focused estimate at 1908.[…]

Scientists say HIV descended from a chimpanzee virus that jumped to humans in Africa, probably when people butchered chimps. Many individuals were probably infected that way, but so few other people caught the virus that it failed to get a lasting foothold, researchers say.

But the growth of African cities may have changed that by putting lots of people close together and promoting prostitution, Worobey suggested. "Cities are kind of ideal for a virus like HIV," providing more chances for infected people to pass the virus to others, he said.

Seen at National Underwriter:

The statement [to the NAIC] by Tom Edwalds, a representative of the Society of Actuaries, Schaumburg, Ill., and Munich American Reassurance Co., Atlanta, was based on pandemic risk model.

While $64 billion in net claims would hurt insurers, the “unpleasant and uncomfortable” tab would be well within the capital ability of the industry, according to Mr. Edwalds.

He said the $64 billion total estimated under a severe scenario includes $34 billion in individual life net claims and $30 billion in group life net claims, according to the SOA report.[...]

Before folks breathe too big a sigh of relief, the article notes that the study excludes the effect of such a pandemic on the P&C industry’s workers comp market, potentially amounting to $400 billion.

Over the weekend, the Financial Times ran an article reviewing the threat of changes in mortality rates (or the estimation thereof) on life insurance, dating back from the old tontine schemes of the 17th centrury, up through the uncertainties raised about pandemic risk and pension funding shortfalls.

Over on the P&C side of the insurance house, some insurers have dabbled in the securitization of catastrophe risk, as a means to gain access to additional risk capacity as well as investors who might wish to diversify their portfolios.

It sounds like the life and pension folks are starting to get into the act too:

Insurance companies have followed suit, launching “mortality bonds” that bet on whether death rates will rise - usually due to something such as bird flu. Axa, the French insurance group, issued one of these last year where investors purchased bonds, and received a cash flow with a value that fell if the level of deaths among Axa policy holders rose. The price of a mortality bond is thus tied into the chance of a pandemic.

Now people in the capital markets are wondering whether this idea can be applied further. If bond purchasers are willing to bet against catastrophe or mortality, why not longevity? A couple of years ago, the European Investment Bank and BNP Paribas made one attempt to do just that. The EIB marketed a 25-year bond, worth £540m, which produced cashflows that were designed to be a mirror image of a pension fund’s liabilities for a hypothetical pool of 65-year-olds. The details of the scheme were complex, but the essential idea was that the payout to bondholders would fall each year, according to the rate of deaths. In other words, the higher the death rate, the less money the bondholders would receive. The investors were expected to be pension funds looking for a way to balance their risks.

The article mentions that the longevity bond described in the second quoted paragraph hasn’t caught on yet, presumably due to the complexity of the risk.

Combine that with the report several months ago that Axa was securitizing the risk of part of its auto insurance book, I can’t help but wonder if in a few decades, insurers and agents might be reduced to being essentially brokerages, writing policies that are then bundled and re-tranched into securities sold in the capital markets.

As seen at WSJ.com (subscriber link):

Taking a cue from hurricane forecasters, federal officials unveiled a system to predict the severity of the next world-wide outbreak of a super flu — a guide to help states determine when they should think about taking increasingly strong steps to combat its spread.[...]

If the CDC decides a new flu strain will be the least severe, with the potential of killing no more than 90,000 people, states would be urged to just isolate the sick, mostly at home, minimizing visitors who might catch the virus.

With a more moderate 1957- or 1968-like strain — 90,000 to 450,000 potential deaths — states might consider closing schools, but CDC doesn’t recommend it and says any closures should be less than a month. If more than 900,000 deaths are predicted, a Category 4 or 1918-like Category 5 pandemic, then CDC does recommend closing schools, from one month to three months, depending on each community’s level of illness. Other steps are recommended too, including avoiding crowded gatherings and encouraging people to work from home.

Information on the severity index can be found at pandemicflu.gov.

Seen at Bloomberg:

Bird flu killed a 37-year-old woman in Indonesia and may have infected hundreds of poultry in Japan as the lethal virus resurfaces across Asia.[...]

The new infections provide chances for H5N1 to mutate into a form more dangerous to people. Millions could die if it mutates and begins spreading easily between people, sparking a pandemic. South Korea, Vietnam and Nigeria had fresh poultry outbreaks last month, while China and Egypt found human cases.

Without an imminent election to distract us, this should be certain to provide fuel for some media hype in the near future.

While some businesses are nervous about pandemic, it seems like at least one specialty insurer sees a business opportunity, if this Insurance Journal is to be believed:

Markel Corporation launched what it termed a “new and unique insurance product: Outbreak(SM) Extra Expense Coverage,” in mid-July. The policy is specifically designed to protect companies from a closure of their business premises due to a variety of contagions, including Avian Flu.

Following the announcement of the launch, Markel noted that it “triggered immediate interest, and Markel affiliates have already begun writing coverage for this new product line.” The demand is linked to an increasing interest in business interruption cover due not only to cases of Avian Flu, but also to “increasing reports of business closures caused by ecoli, salmonella and legionnaires, as reported in the worldwide media, ” said the bulletin.

The New
York Times brightens our Sunday with this bit of news:

In the wake of a cluster of avian flu cases that killed seven
members of a rural Indonesian family, it appears likely that there have been
many more human-to-human infections than the authorities have previously
acknowledged.[...]

Until recently, World Health Organization representatives have said there
were only two or three such cases. On May 24 Dr. Julie L. Gerberding,
director of the federal Centers for Disease Control and Prevention in
Atlanta, estimated that there had been “at least three.” Then, last Tuesday,
Maria Cheng, a W.H.O. spokeswoman, said there were “probably about half a
dozen.” She added, “I don’t think anybody’s got a solid
number.”

Still no pandemic…and it’d be nice to think that H5N1 ends up being mostly
hype, but still….

Bloomberg has this bit of, um, “happy” news:

All seven people infected with bird flu in a cluster of Indonesian cases can be linked to other patients, according to disease trackers investigating possible human-to-human transmission of the H5N1 virus.

A team of international experts has been unable to find animals that might have infected the people, the World Health Organization said in a statement today. In one case, a 10-year- old boy who caught the virus from his aunt may have passed it to his father, the first time officials have seen evidence of a three-person chain of infection, an agency spokeswoman said. Six of the seven people have died.

As seen in Sunday’s Independent:

Donald Rumsfeld has made a killing out of bird flu. The US Defence Secretary has made more than $5m (£2.9m) in capital gains from selling shares in the biotechnology firm that discovered and developed Tamiflu, the drug being bought in massive amounts by Governments to treat a possible human pandemic of the disease.

The article goes on to mention that Rumsfeld sat on the board of the manufacturer of Tamiflu, and has recused himself when appropriate to avoid conflict of interest.

In fairness, this is not necessarily a nefarious thing. The headline looks bad at first glance, but I suppose that such quirks will arise unless an impermeable wall is erected between the business world and government…something that probably wouldn’t be the best idea in the world.

Still, you wonder if there isn’t a better way to avoid such conflicts of interest — maybe a special blind trust / mutual arrangement whereby government officials deposit all of their stocks, etc. in return for shares of the fund. When they leave office, they can withdraw funds from the fund and repurchase their shares, if they so choose.

Specialty Insurance Blog observes in this post that the Society of Actuaries has launched a research working group to examine the potential impact of pandemic on life and health insurance writers.

Specialty Insurance Blog asks: “What will be the impact on the property/casualty business?”

That’s a good question. It’s also one that’s arguably beyond the scope of the SOA’s charter (the SOA is generally for life/health/pension actuaries; the CAS is generally for P&C actuaries).

A quick answer would be that a full-blown pandemic would be bad for P&C writers, but nowhere near the nightmare it would be for life and health insurers.

A quick Google search turns up some interesting thoughts, such as this one (Google cache) by Business Insurance:

New York-based S&P said in a report issued in November that losses would occur among health insurers, commercial property/casualty underwriters, life insurers, property and life reinsurers and retrocessional programs. Automobile and homeowners insurance would likely be the only lines “not to suffer a hit” by avian flu-related claims, S&P said.[...]

Workers comp insurance does not cover illnesses unless they are contracted “out of the course of employment,” explained Mark J. Noonan, Boston-based managing director and head of Marsh Inc.’s workers compensation practice for North America.

The avian flu, though, does generate some “interesting issues,” Mr. Noonan pointed out. For example, if the flu were not present in the United States but an employee traveling on business in Asia were to contract the virus and spread it to workers upon returning, their only exposure likely would be at the workplace, he explained. Health care workers would also be at risk of contracting the illness on the job.[...]

Mr. Falzarano said employers should determine whether their general liability coverage would offer protection from claims related to the avian flu. He recalled that employers were hit with liability claims in 2003 when they were accused of being unprepared for the epidemic of severe acute respiratory syndrome that swept through Asia.

Although S&P says business interruption losses would hit insurers in a pandemic, many risk managers aren’t counting on that coverage to make up revenue lost to reduced productivity.

The coverage generally requires “direct physical damage” before it could be triggered, explained a risk manager with a large retailer that has operations in the United States, Asia and elsewhere. “I assume you can buy contingency business interruption coverage” to cover the exposure, he added, but “I haven’t heard of any avian flu business interruption policies.”[...]

There have been discussions within the CAS on the subject. For example, an interested person might check out the handouts from the 2004 CAS Annual Meeting (scroll down to “Plagues of the 21st Century”).