IP-19 Pandemics – Impact on Group Insurance 2006 General Meeting Chicago, Illinois

IP-19 Pandemics – Impact on Group Insurance2006 General Meeting

Chicago, Illinois

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

Hugo Maureira

Cathy Shum-Adams

Philippe Trahan

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and

businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA ,

AMF• Impact of a Pandemic on Group Benefits –

what one insurer has tried to quantify• Modeling of a Pandemic scenario &

reinsurance solutions available• Conclusion• Q&A

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Session Content• General overview of Avian Flu (H5N1)General overview of Avian Flu (H5N1)

By Cathy Shum-Adams• Impact of a Pandemic on the economy and businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA , AMF• Impact of a Pandemic on Group Benefits – what one

insurer has tried to quantify• Modeling of a Pandemic scenario & reinsurance

solutions available• Conclusion• Q&A

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WHO – Current Alert Level

Source: www.who.int

November 2005

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WHO – Current Alert Level

• WHO Level 6 Pandemic – Efficient & sustained human-to-human transmission– Connection between Bird flu, Human

flu & Pandemic flu:• Bird flu + Human flu = Pandemic flu

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General Overview of Avian Flu• Nations with confirmed cases H5N1 Avian Influenza: July 7, 2006

Source: www.pandemicflu.gov

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General Overview of Avian FluCumulative Number of Confirmed Human Cases of Avian Influenza Reported to WHO

October 11, 2006

2003 2004 2005 2006 Total Country

cases deaths cases deaths cases deaths cases deaths cases deaths

Azerbaijan 0 0 0 0 0 0 8 5 8 5 Cambodia 0 0 0 0 4 4 2 2 6 6 China 1 1 0 0 8 5 12 8 21 14 Djibouti 0 0 0 0 0 0 1 0 1 0 Egypt 0 0 0 0 0 0 14 6 14 6 Indonesia 0 0 0 0 19 12 50 40 69 52 I raq 0 0 0 0 0 0 3 2 3 2 Thailand 0 0 17 12 5 2 3 3 25 17 Turkey 0 0 0 0 0 0 12 4 12 4 Viet Nam 3 3 29 20 61 19 0 0 93 42 Total 4 4 46 32 97 42 105 70 252 148

Mortality rate = 58.7%

Source: www.who.int

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Pandemics – Trivial Questions

• Last 3 pandemics in the 20th century – 1918, 1957 & 1968:

• Did they all involve a strain of the Avian flu?

• Did they originate from southeast Asia?

• Why was the 1918 pandemic named the Spanish Flu then?

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Preparedness Mindset• What the medical experts are saying …

1918 1957 1968 ??

• “That will never happen” mentality & short-term memories

• Short history of potential disasters… that never happened. Remember these?

–Y2K–The Ebola Virus–Mad Cow Disease–Killer Bees

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Preparedness Mindset

• Pandemic – planning for the unknown – STUFF HAPPENS!

• Accept that we’re planning for a risk where much is unknown

• Donald Rumsfeld’s approach to analysis:– The known knowns– The known unknowns– The unknowns unknowns

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and businessesImpact of a Pandemic on the economy and businesses

By Hugo Maureira• BCP & risk management for a PandemicBCP & risk management for a Pandemic

By Hugo Maureira

• Pandemic planning – info from OSFI, CLHIA , AMF• Impact of a Pandemic on Group Benefits – what one

insurer has tried to quantify• Modeling of a Pandemic scenario & reinsurance

solutions available• Conclusion• Q&A

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Outline

I. Social and Economic Impact

II. Pandemic Business Continuity Planning

III. Legal Considerations

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Objectives

• To give an overview of the potential economic impact that a pandemic may have on Canada, the United States and the World

• To stress the importance of emerging economies in considering the potential economic impact

• To offer a balanced view free of fear mongering on the one hand, and cynicism on the other

• To explain the uniqueness of pandemic BCPs, what they might contain and specific items to consider

• To explain how the post-SARS legal environment might affect businesses particularly with respect to workplace health and safety and 3rd party liability

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I. Social and Economic Impact

1. Behavioural Changes

2. Projected Losses

3. Emerging Economies

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I. Social and Economic Impact1. Behavioural Changes

• Consumer Confidence– Consumer habits and social patterns– New opportunities– The economics of mass panic: SARS

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I. Social and Economic Impact1. Project Losses

Region Clinically Ill Deaths Hospitalizations Outpatient Visits

World n/a 2 to 8 million (conservative estimate)

n/a n/a

Canada 4.5 to 10.6 million

11,000 to 58,000 34,000 to 138,000

2.1 to 5.0 million

Ontario n/a 2,892 to 19,733 but most likely 5,100 to 11,899

7,474 to 65,498 but most likely 22,276 to 51,978

1,421,245 to 3,316,237 but most likely 990,974 to 2,312,272

Toronto n/a 632 to 4,260 but most likely 1,111 to 2,590



Public Health Impact

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I. Social and Economic Impact1. Projected Losses

A brief word on projected loss modeling…

• Meltzer, Cox & Fukuda• FluAid 2.0

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Region Projected Economic LossWorld $3 trillion

Canada Health Care: $330 million to $1.4 billionLost Productivity: $5 to $38 billion

United States $220 to $670 billion

Economic Loss: World, Canada, and US

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Scenario Illness Deaths GDP RecessionSevere Pandemic

90 million 2 million 4 ¼% drop

Yes

Mild Pandemic

75 million 100,000 1% drop No

Impact on U.S. GDP Under Severe and Mild Scenarios

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I. Social and Economic Impact1. Projected Economic Loss

Scenario Labour Force Size (2004)

Attack Rate

Mortality Rate

No. of Dead, Labour Force (Raw)

No. of Dead Labour Force (as %)

SeverePandemic

147.4 million

30% 2.5% 1 million 0.75%

Mild Pandemic

147.4 million

25% 0.1% 50,000 0.03%

Impact on U.S. Labour Force Under Mild and Severe Scenarios

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I. Social and Economic Impact2. Emerging Economies

• The influence of emerging economies

• Avian influenza pandemic in Asia: Implications for the world economy

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III. Pandemic Business Continuity Planning

1. The Uniqueness of Pandemic Planning

2. Basic Structure

3. Issues to Consider

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III. Legal Considerations

1.Lessons from SARS2.Emergency Legislation3.Employment Related Legislation

(Ontario and Canada)

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BCP – Canada & U.S. Surveys• Surveys from Conference Board – both Canada and U.S. - how

prepared businesses are for a potential flu pandemic:

Canada U.S Concerned about impact 80% - Preparedness plan in place or working on one

75% - 4% in place - 71% working

75%

No plan and not planning on working on one

25% 25%

Canadian: 75 organizations

U.S.: 553 organization

More than 40% Canadian companies surveyed do not have a communication strategy in their pandemic planning

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA , AMFPandemic planning – info from OSFI, CLHIA , AMF

By Cathy Shum-Adams

• Impact of a Pandemic on Group Benefits – what one insurer has tried to quantify

• Modeling of a Pandemic scenario & reinsurance solutions available

• Conclusion• Q&A

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Pandemic Planning- OSFI

In April 2006, OSFI sent a pandemic letter to: • Federally regulated financial institutions (FRFIs) • CLHIA • Insurance Bureau of Canada (IBC)• Canadian Bankers Association (CBA)• Credit Union Centre of Canada

Letter to organizations, other than FRFIs:

• Would like to know any initiatives each organization has undertaken

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Pandemic Planning- OSFILetter to FRFI’s:

• Pandemic preparedness an area of increasing supervisory focus

• Discussing approaches in domestic and international regulatory agencies for possible best practices

• Board/Senior Mgmt should:–Understand the potential implications of a pandemic on operations and financial condition

–Review the institution’s preparedness pans –Consider a pandemic scenario in financial stress tests

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Scenario Testing - OSFI• Survey of big companies to test such a scenario:• Assume 6.2M Canadians fall ill• 133,000 die• On average, sick workers miss 2 weeks of work

Age Excess mortality per 100,000

0-14 486 15-19 450 20-24 650 25-34 946 35-44 475 45-54 221 55-64 137 65 and + 60

In DCAT, consider an integrated scenario with increase in morbidity, mortality and other impacts (e.g. economic).

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Pandemic Preparedness Update - CLHIA

• Activities underway to develop a network of federal & provincial health agency… communication

• Collaborated with Authorité des marchés financiers (AMF)… guidance on developing business continuity planning

• CLHIA will continue to work with AMF, OSFI and other regulators in planning initiatives evolve.

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Influenza Pandemic Guide - AMF

• Intended for Quebec financial institutions• In line with guidelines of the IMF &

Joint Forum of the Basel Comm.• Assumes major economic impact,

followed by a rapid recovery• Effects would be different from one

industry to another• BCP to assume pandemics over a lengthy

period, several waves of varying intensity could occur

Following data from AMF Influenza Pandemic Guide, August 2006

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Influenza Pandemic Guide - AMF• Table 1 – Characteristics of the risk of an influenza pandemic

Risk Characteristic Estimate Morbidity 35% in the 1st wave over an 8 week period Mortality Difficult to predict

As of June 20, 2006 – actual mortality rate from avian flu was 57%

Occurrence date Date when H5N1 virus mutates into a form transmissible between humans Impossible to predict

Duration Several waves of variable intensity, around 6 weeks’ duration Overall duration could be from 12 to 36 months

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• According to the World Economic Forum:

• Scenario-based analysis:– Base-case scenario – current trend– Worst-case scenario – worst plausible

developments

• Scenarios considered for two different time periods:– Short-term over one year (2006)– Long-term over 10 years (by end of 2015)

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Influenza Pandemic Guide - AMF• According to the World Economic Forum:Table 2 – Levels of severity of the impact of an influenza pandemic (a) (b) (c) Score Losses in terms

of human lives Economic impact (losses in USD)

Impact on growth (% of world GDP)

1 < 100 $10 - $50 B < 0.2% 2 100 to 10,000 $50 - $250 B 0.2% to 0/7% 3 10,000 to 1 M 250 B to 1 T 0.7% to 1.5% 4 Over 1 M Over 1 T Over 1.5%

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Influenza Pandemic Guide - AMF• According to the World Economic Forum:Table 3 – Assessment of the risk of an influenza pandemic in terms of

probability & severity

Scenarios Assumptions Probability Severity

(a) – Score 3 (b) – Score 4

S/T Base - 30% morbidity in global population - mortality is low - absent from work for 2 weeks - 2% reduction in World GDP

1 – 10%

(c) – Score 4


S/T Worst - 30% morbidity in global population - mortality is 0.4% - absent from work for 2 weeks - 6% reduction in World GDP

1 to 10%

(c) – Score 4


L/T Base - risk of the emergence of a human influenza virus remains the same - impact is only 1/3 of 2006

1 to 10%

(c) – Score 2 (a) – Score 4 (b) – Score 4

L/T Worst - pandemic risk is low in the developed world but remains moderate elsewhere

< 1%

(c) – Score 4

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• Anticipated impact on Quebec – from Quebec Department of Health:

35% affected in 1st wave over a 8-week period 2.6M people infected (1 out of 3) 1.4M people need care 34K people require hospitalization 8,500 people may die

Morbidity rate = 35%

Mortality rate = 0.33%

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA , AMF• Impact of a Pandemic on Group Benefits – what one Impact of a Pandemic on Group Benefits – what one

insurer has tried to quantifyinsurer has tried to quantifyBy Cathy Shum-Adams

• Modeling of a Pandemic scenario & reinsurance solutions available


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General Overview of Avian Flu

• Insurance Company Implication:• Excess claim risk• Liquidity risk• Credit risk• Supply-line disruptions e.g. TPA’s, assistance co’s• Counterparty risk• Reputation risk - Red Cross during Hurricane

Katrina• Workforce disruption with an increased demand for

services• Sales may go up? Premium rates may rise?

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Excess Mortality Caused By Flu

• The rates of infection, morbidity and mortality, as well as their distribution by age group, would no doubt have an effect on the amount of claims & benefits to be paid.

1 3 . S ou rce : C e n te rs fo r D is ea se C o n tro l a n d P reve n tio n – D e p a rtm en t o f H e a lth a nd H u m a n S e rv ic es h ttp ://w w w .cd c .g ov /nc ido d /E ID /v o l12 n o0 1 /0 5 -09 7 9 -G 2 .h tm

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Hypothetical Group Portfolio

$208 million Weekly Insured Volume $0.40 / $10 Avg Inforce Rate $100 million Annual Insured Premium

Group STD

$0.20 / $1000 Avg Inforce Rate $41.7 billion Insured Volume

$100 million Annual Insured Premium Group Life

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Financial Impact – Group STD •Financial Consequences: Assume $100 million annual premium, common STD plan with 1 week EP, ignore first day hospital clause

30% 20% 10% Quarantine Rate 6 weeks 4 weeks 2 weeks Length of

Quarantine

4 weeks 3 weeks 2 weeks Length of Illness 35% 30% 25% Infection Rate

Severe Moderate Mild Assumptions

$312 million

$125 million

$21 million Quarantine Claims

$520 million

$250 million

$73 million Total Claims Increase

$208 million

$125 million

$52 million Illness Claims

Severe Moderate Mild Claims Spike

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Financial Impact – Group Life

•Financial Consequences: $100 million annual premium with approx $41.7 billion Group Life insured volume

0.30%

Moderate

3.0% 0.67% 0.03% Mortality Rate

Nightmare Severe Mild Assumptions

$125

Moderate

$1,250 $279 $12.5 Life Claims

Nightmare Severe Mild Claims Spike ($ millions)

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Financial Impact – Group LTD

• Normal flu recovery period is 10 days

• With average EP of 90 days, the impact will likely be small

• Maybe spillover from STD into LTD:– Complication/residual physical

effects– M&N

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Financial Impact – Group Dental

• Some expected claims to go down temporarily… back to avoidance of large gathering places

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Financial Impact – Group Medical

• Claims will likely increase for hospitals, drugs & OOCM?

• Who will pay for a vaccination program?

• Travel advisory • Borders may be closed and

repatriations not possible

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Financial Impact – Group AD&D

• As the cause is accident-related, should have no impact?

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Financial Impact – Group CI

• Is it plausible for those that are seriously infected to go into a Coma, Paralysis, damage to hearing…?

• How does this translate into additional morbidity rate?

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Group Insurance – considerations

• Stop writing new business during a pandemic?

• Do we expect sales to go up during a pandemic?

• Do we expect to increase rates to mitigate the risks or recoup losses?

• Do we charge more now and build up a pool for a possible pandemic?

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA , AMF• Impact of a Pandemic on Group Benefits – what one

insurer has tried to quantify• Modeling of a Pandemic scenario & reinsurance Modeling of a Pandemic scenario & reinsurance

solutions availablesolutions availableBy Philippe Trahan


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Meet H5N1

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Risk Transfer Solutions• Insurance

• Reinsurance

• Capital Market

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1.1 Life Insurance Solutions

• Bird Flu Life Insurance• Beijing Minsheng Life Insurance on November 7th was first to launch a policy that would pay the insured if they are infected by the H5N1 virus. Four days later, Shenzhen-based Hua-an Property Insurance followed. • The policy costs 100 yuan for each 200,000 yuan of compensation. It is valid for a year for anyone aged 3 to 70. • The pricing Implies an annual H5N1 death rate of less than 0.05%.

• Industry solution?• A Vietnamese chicken retailer has attached a 100 million Dong certificate to each bird sold and which will pay the indemnity offered to anyone who catches the bird flu virus after eating his product.

• Risk Mitigation? • In Vietnam, marksmen are being hired to shoot pigeons and other birds within the city proper in order to stave off the bird flu virus. Each sharp-shooter earns $7 a day. • The marksmen shoot with BB guns and admit that, although the birds' carcasses are to be destroyed, they can make more money selling the birds to restaurants that specialize in roasted pigeons.

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1.2 P&C Insurance Solutions

• By and large, the Avian Flu exposure of traditional P&C lines of business is perceived to be limited to a few well-defined parts: event cancellation, workers compensation of healthcare employees, some liability and food industry specific perils.

• One London Underwriter has come up with the Outbreak Extra Expense Coverage, specifically designed to protect Canadian small business from business interruption due to a contagion such as Avian Flu:

– The coverage provides for extra expenses in the event a business premises is closed or quarantined by a public health official.– The use of the insurance proceeds are determined by the policyholder and can be used for a wide variety of loss events that could accompany a quarantine and closure, including income, payroll, communications, public relations cost, clean-up and more.– The closure can be for a wide-variety of contagions: SARS, Avian Flu, Norwalk, Legionnaires and many other viruses and bacteria. It also includes a "workplace violence" component that provides coverage for such an event that closes a business.– Limits range from $5,000-$50,000 per day for a maximum of 30 days.

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2. REINSURANCE SOLUTIONS• Issues

– Pricing– Capacity

• Solutions

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• “Unknown” aspect forcing reinsurers to be cautious.

– Age group impact– No consensus on severity

• Modeling– Credibility has been dented– Data quality

• Data, or lack thereof– Few historical precedents– Variability of historical exposure– Cause of death

2.1 REINSURANCE ISSUESHow do you price it?

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2.1 REINSURANCE ISSUESCapacity is limited

• Life reinsurers• Already concerned about their assumed pandemic

exposures• Correlation with equity markets

• P&C reinsurers• Limited geographical diversification available• Pandemic is not an accident• Minimum return on capacity pricing• Data and modeling• Correlation with equity markets

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2.2 REINSURANCE SOLUTIONS

• Proportional

• Traditional Excess of Loss

• Structured

• Abnormal Mortality Stop Loss

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2.2 REINSURANCE SOLUTIONSTraditional Excess of Loss

• Pays if :– all death and/or disability/sickness claims

exceed retention; AND– WHO declares a phase 6 pandemic

• Covers all claims paid during 12 months following WHO trigger

• Structured to protect solvency

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• Need to determine cause of death– Adjudication costly and contentious– Indirect claims are not covered

• Limited reinsurance capacity

• Reinsurance credit risk

2.2 REINSURANCE SOLUTIONSTraditional Excess of Loss

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• Coverage attaches between 120% to 150% of expected claims during the period.

• Treaty period varies between 1 to 3 years

• Covers all causes of deaths

2.2 REINSURANCE SOLUTIONSAbnormal Mortality Stop Loss

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• Comprehensive

• Simple



2.2 REINSURANCE SOLUTIONSAbnormal Mortality Stop Loss

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• High upfront cost (20% of limits).

• 80% No Claim Bonus (Net 4%)

• 3 year term.

• The net 16% cost is held in interest bearing claim fund. Does not need to be directly paid to reinsurer

2.2 REINSURANCE SOLUTIONSStructured Risk Reinsurance

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• Risk transfer acceptance


2.2 REINSURANCE SOLUTIONSStructured Risk Reinsurance

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3. Capital Market Solutions

• Securitization

• ILW

• Others

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3. Capital Market SolutionsSecuritization

• Abnormal Mortality Cat Bond• Few placed: Swiss Re, AXA Re, Scottish Re

Deal Name: Vita Capital Ltd.

Sponsor: Swiss Re

Domicile: Cayman Islands

Issued Amount: $400 Million

Series A B C D$0 MM $62 MM $200MM $100MM

Interest Spread: LIBOR+1.35% LIBOR+0.90%, LIBOR+1.40% LIBOR+1.90%

Attachment Probability: 7.7 bps 0.15 bps 1.65 bps 7.55 bps 23.44 bpsExpected Loss: 1.6 bps 0.03 bps 0.73 bps 4.11 bps 14.88 bpsExhaustion Probability: 0.3 bps <0.01 bps 0.15 bps 1.65 bps 7.55 bps

Covered Area: United States, United Kingdom, France,Switzerland and Italy

Reporting Agency: US Center of Disease Control and PreventionNational Center for Health Statistics

United Kingdom: Office for National StatisticsFrance: Institut National de la

Statistique et des Études Économiques Switzerland: Swiss Federal Statistical Office

Italy: Istituto Nazionale di Statistica

Trigger Mechanism: Combined Mortality Index, Trigger is 130%Trigger is 125% Trigger is 120% Trigger is 115% Trigger is 110%

Issue Date: December 5, 2003Maturity Date: January 1, 2007Calculation Agent Milliman USA

Ratings: S&P A+, Moodys A3 A-/Aa3 BBB+/A2 BBB-/Baa2

Vita Capital II Ltd.

Swiss Re

Cayman Islands

$362 Million, $2B shelf registration

United States, United Kingdom, Germany,Canada and Japan

US: Center of Disease Control and PreventionNational Center for Health Statistics

United Kingdom: Office for National StatisticsGermany: Statistisches Bundesamt

Canada: Statistics Canada

Milliman USA

Japan: Ministry of Health

Combined Mortality Index

April 13, 2005January 1, 2010

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Class D Class C Class B Class A

Influenza Epidemic (1918) ✔ X X XWorld War II (1939-45) ✔ ✔ X XKorean War (1950-53) X X X XVietnam War (1967-74) X X X XAIDS (1995) X X X XSeptember 11 (2001) X X X XEuropean Heat Wave (2002) X X X X

3. Capital Market SolutionsSecuritization

What event would have triggered Vita 2?

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3. Capital Market SolutionsIndustry Loss Warranties

• Typically found for P&C catastrophes, notably for retrocession business

• Pays if a pre-defined index is exceeded

• Doesn’t take into account actual losses to ILW holder

• What index should be used?

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3. Capital Market SolutionsOthers

• Swap

• Sell the market short

•

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Session Content• General overview of Avian Flu (H5N1)• Impact of a Pandemic on the economy and

businesses• BCP & risk management for a Pandemic• Pandemic planning – info from OSFI, CLHIA ,

AMF• Impact of a Pandemic on Group Benefits –

what one insurer has tried to quantify• Modeling of a Pandemic scenario &

reinsurance solutions available• ConclusionConclusion• Q&A

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Conclusion

• Global implication –– your business will be affected directly or indirectly

• There is opportunity here as well… if you can stay up and running when others cannot

• Be prepared, don’t ignore, don’t obsess

IP-19 Pandemics – Impact on Group Insurance 2006 General Meeting Chicago, Illinois

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