Pandemic risk

By Bansri Patel and Truphena Lwanga

Our motivation

The actuary

November

issue(2013)

Pages 22-24

What is a pandemic?? A pandemic arises when a disease that affects at least

25% of the globe causes high morbidity, excess mortality

and social and economic disruption.(according to AON)

According to the World Health Organization,

a pandemic can start when three conditions have been met:

the emergence of a disease new to the population

the agent infects humans, causing serious illness

the agent spreads easily and sustainably among humans

More history… Peloponnesian(430-426BC)-Typhoid(Athenian troops)

Antonine plague(165AD-180AD)-Smallpox(Near East)

Plague of Justinian(541AD)-Bubonic plague~1st outbreak

from Egypt to Constantinople

Cholera(1816AD-1834AD) From India, China~ New York,

London, Ontario

Asiatic flu 1889 AD-1890AD

Typhus fever

• Camp/Gaol fever ~Spain to France and Italy(1489AD-

1528AD)

• 1812-killed Napoleon’s ‘Grande armee’

• Killed many Nazi concentration camp prisoners

Examples of historical pandemics…

The black death(1343-53)

(Purview: Middle east to

Europe)

Spanish Flu, 1918

Poliomyelitis(1950s)

Asian flu, 1957:

Hong Kong flu, 1968:

More recent pandemics…

Ebola outbreak( February 2014-…)-west Africa

H7N9 bird flu (2013)

Swine flu (2009)

H5N1 avian flu

HIV/AIDS(1980s-2001)

Spanish flu

This is seen as by far the most deadly influenza

pandemic in recorded history (400 years).

Normally for flu 90% of the deaths are people older

than 65

However, 99% of the deaths caused by the Spanish

Flu in 1918 were people under age 65.

death toll worldwide was as high as 5- 10 million

people.

it is unclear as to how many of these deaths were

actually caused by the Spanish Flu and not due to

other consequential reasons(Incomplete statistics

!!)

Asian flu 1957

death toll resulted in around 1-2 million worldwide (in the

US this meant an additional 70,000 deaths that year

deaths were this time more amongst elderly persons and

infants.

The picture looks more like a normal seasonal flu, but with

a much higher infection rate.

“ I had a little bird

It was named enza

I opened the window

An in-flu-enza”

Questions we tried to tackle?

What do these ‘pandemic risks’ mean for LIFE

INSURANCE?

As an insurer how do you know if there’ll be a pandemic?

If so on a probabilistic scale, how bad?

How do you prepare? What can we do?

consequences Mortality rates tend to be high~ increased number of

claims(pandemics weren’t factored in calculating mortality rates)….huge losses

Affect the younger working class members more than older

members of society(Who have just taken life insurance and

not paid many premiums e.g Spanish flu).

Increase in demand for insurance products mostly basic like

health insurance.

Economic impacts.

Secondary infection as a result.

Specific impact on life insurance

Endowment policies, whole life and term insurance

policies are likely to suffer a loss as lump sum is paid

at the death of the person to the beneficiary. There

will a rapid increase in claims.

Pure endowment policies might benefit because

people would die within the policy and sum insured is

only paid if the person survives a certain age.

Pensions- Old age pension and survivor’s pension

Pure life reinsurers are likely to face losses.

Reinsurers diversification can bring down reinsurers.

The reinsurers with younger risks being

covered suffer if the death toll affects the

youngsters.

Depletion of reserves set aside.

Any other ideas….

Recommendations on what to do(how to

prepare as an actuary for pandemics)…

Lower the ω(when calculating tpx as the life

expectancy has lowered when pandemics arise.)

Use of the epidemiologists’ statistics to try and generate a ‘what if’ analysis for probability of occurrence and frequency of waves if it occurs

Find worst case scenario for insurer and work to

reserve as much.

Structuring the policies of the younger and older

persons in a manner that they offset each other if

and when the pandemic occurs.

Diversification of life insurance products and the

dates. Avoidance of pure mortality insuring or only

insuring young risks.

Raising the required solvency ratio for mortality

insurers and health insurers in case of pandemics .

E.U proposed a ratio of 0.3 but it is still in the

works.

Pandemic modelling

Decisions to be made:

Stochastic vs deterministic?

Insured vs population mortality?

Re-metrica dynamic financial analysis

tool

Hedging strategies DIRECT

Pandemic catastrophic coverage

Stop loss cover

Pandemic industry loss warranty

Extreme mortality bonds

INDIRECT

Business mix mitigation

Contingent capital

Using the pandemic risk map to index

the current mortality tables

Previous photo credited to Maplecroft who came

up with the map.

“The good news is that, even if the

insurance market seems largely ill-prepared,

the national preparedness plans can help in

model calibration”

(the actuary magazine)

WHAT about Kenya in all this?

Changes in the Kenyan insurance market due

to the 1990-2001 HIV/AIDS scourge…

Changed ω when calculating tpx to 62 years. This has led to a reduction in the annuities purchased (1% of the products sold)due to the low life expectancy.

Increment of adverse selection, because

HIV and AIDS Prevention and Control Act, 2006 – •no person shall be compelled to undergo a HIV test or to disclose his HIV status for the purpose only of gaining access to … life insurance .. •AND the organization should devise a reasonable limit of cover for which a proposer shan’t need to disclose HIV/AIDS status

An estimated 49,126 people died of AIDS-related causes in 2011,

approx 35% of the figure in 2002–2004. Encouraging !! For that reason

we no longer use the UK 1949-1952 tables we now use the KE-2003-05

tables.

The solvency ratio in the country for life assurers has

changed(increased)

This HIV/AIDS pandemic has increased the underwriting costs for both

new businesses and for claims

Apparently unit-linked policies are better choice for the insurer and

insured in the market with the HIV risk?(food for thought)

A suggested method of increasing the average mortality rates is that

the high withdrawals would be compounded by a HIV risk coefficient

Any questions on pandemic risk???

Thank you for your time….stay frosty