Mini-pandemics more worrying than you think

January 08, 2019 14:25
Mini-pandemics such as the common flu can bring about a substantial impact on insurers. Photo: Reuters

Last year marked the 100th anniversary of the Spanish flu pandemic which killed an estimated 50 million people.

We need to look at pandemics and mini-pandemics in modern times and their potential impact on the insurance industry.

According to The World Health Organization, a pandemic can be defined as an epidemic disease that has spread across populations over vast areas.

Global pandemics such as the Spanish flu and localized epidemics such as the outbreak of cholera or dengue fever have claimed many millions of lives worldwide.

The risk of pandemics occurring anytime and anywhere translates into a growing concern for the insurance industry. At the same time, mini-pandemics such as the common flu can bring about a substantial impact on insurers.

If you were to ask most insurers today what they think, or do, about pandemic risk, they might respond in one of the following ways:

• "What’s the point of worrying about a 1-in-1,000-year event?"

• "If we go bankrupt, our competitors will too."

• "We hold the pandemic risk capital required by the regulator and that’s enough. It is only calculated assuming a mortality spike due to something like a massive flu epidemic and isn’t very onerous."

But such responses miss the point. Insurers are exposed to all sorts of events in the spectrum of pandemic risk, not just a catastrophic flu epidemic that could devastate humankind. Yet few are taking actions to guard against these risks.

To begin with, wider global trends are significantly impacting the frequency and scale of such pandemics. These trends include climate change, global travel patterns, technology advances, and the rise of multidrug resistance.

It has long been known that the incidence of epidemics is correlated with weather events. For example, El Niño brings with it increased malaria, diarrhea and hantavirus infections, and La Niña chikungunya virus, West Nile virus and Japanese encephalitis outbreaks.

With the rapid acceleration of international air travel – over 2 billion air passengers were recorded per annum in the first decade of this century (compared with only 70 million in the 1950s) – we see disease-carrying pathogens carried across continents increasingly quickly.

Higher drug resistance is also becoming a real problem, as overuse of antibiotics, pesticides and vaccines renders them ineffective at preventing and treating infectious diseases.

A bright spot on the horizon at least is that technological innovations, such as mobile apps and telemedicine and mobile prescriptions, are making it easier to identify, report and widely communicate the early days of an epidemic, and to administer early-stage consultations and treatment to contain the spread of disease.

However, the effect of these factors can be that small-scale, fairly contained epidemics can still cause severe financial stress. When the severe acute respiratory syndrome (SARS) broke out in 2003, the MSCI Pacific ex-Japan Index fell by 12.8 percent in two months, while Asia-Pacific airlines saw revenues fall by US$6 billion. 

Tourism to Singapore fell 70 percent and Singapore’s GDP reduced by US$400 million that year. The World Bank estimated China’s SARS-related losses at US$15 billion, and global losses at up to US$40 billion.

In a globally connected world, an epidemic spreading to nine countries could cost the United States between US$8 billion to US$41 billion.

For now, most insurance companies still tend to think about pandemics in terms of 1-in-200 meltdown scenarios, and they can be somewhat fatalistic about such events, doing nothing as a result.

However, long before extreme events hit, there are less severe events that can still significantly impact a company’s financial metrics.

Insurers are putting themselves at risk if they overlook planning for pandemics that are less than “total death and devastation” scenarios. Those firms that implement effective risk management strategies will be best placed to successfully manage such situations to the benefit of everyone involved.

This article is written by Siao Wearn Leong, Head of Health Insurance, Asia, Insurance Consulting and Technology, Willis Towers Watson, and Greg Solomon, Head of Life & Health, Willis Re International, Willis Towers Watson.

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Head of Health Insurance, Asia, Insurance Consulting and Technology, Willis Towers Watson