A moderate avian flu outbreak similar to the 1957 and 1968 flu pandemics could significantly impact the life insurance industry, generating $31 billion in additional death claims, according to a new analysis by the Insurance Information Institute. A severe avian flu outbreak along the lines of the 1918 pandemic could have a far more serious effect, causing an estimated $133 billion in additional death claims.
The I.I.I. pointed out that the impact of an influenza pandemic on specific life insurance companies might differ widely, depending on a number of factors.
Although many variables might affect the number of people who could catch and die from the avian flu, the U.S. Department of Health and Human Services projects that in a severe flu pandemic similar to the 1918 experience, 1.9 million people in the U.S. could die. The HHS projects 209,000 deaths from a moderate influenza pandemic, based on the 1957 and 1968 outbreaks. In a typical year, 36,000 Americans die from the flu.
“Given the lack of modern experience with vast health disasters and the numerous public health false alarms—from mad cow disease to swine flu—it is more difficult to predict the effect of an influenza pandemic on life insurance companies than to forecast the potential damage from landfalling hurricanes,” said I.I.I. economist Dr. Steven Weisbart.
If the next influenza pandemic follows the mortality pattern of the 1918 outbreak, with about one-half of the deaths in the 18 – 35 age range, then many who die would be covered by both group and individual life insurance, he said. Normally most flu deaths occur among the very old and the very young—populations unlikely to have large amounts of life insurance.
Using the HHS “severe” death forecast of 1.9 million, the I.I.I. estimates that the dollar value of death claims from the flu would be $54 billion for group life insurance policies and $79 billion for individual life insurance policies, a total of $133 billion. The comparable numbers for a moderate pandemic are $11 billion for group life insurance and $20 billion for individual life insurance, for a total of $31 billion.
“In a severe pandemic, some companies, especially those most heavily focused on group and individual term life insurance, might have to go into the capital markets to raise additional funds for claims payments,” Weisbart said.
The effect of a pandemic on a particular life insurance company would depend on many factors. These include:
* Where a company’s insureds are located in relation to outbreaks of the disease, including exposure to certain foreign markets (especially Asia) where the outbreak may be more severe.
* The extent to which a company’s particular investments are affected by the spread of the disease.
* How easily a company can convert assets into cash for the purpose of paying benefits.
* The diversification and character of a company’s products (e.g., whether it writes group life insurance, or whether it also writes other lines of business that remain profitable).
* How conservatively a company has calculated its reserves.
* What a company’s reinsurance arrangements are (and how well its reinsurers handle the claims ceding insurers make against them).
* How strong a company’s capital and surplus position is entering the pandemic.
* To what extent a company is able to raise additional capital under pandemic circumstances.
Dr. Weisbart further observed that reinsurance—insurance bought by insurance companies—might help mitigate the loss, but since the life reinsurance market is highly concentrated, and all companies with reinsurance would be seeking reimbursements at the same time, questions about some life reinsurers’ ability to pay could arise.
The analysis also pointed out that a severe influenza pandemic would affect the life insurance industry in many ways beyond death claims. For example, asset values could shrink, although this effect would probably be of short duration.
A severe pandemic also would likely affect insurers as employers, both because their employees would miss workdays if they became sick—and some would die—and because the workload would simultaneously increase dramatically, at least in the claims processing areas.
“However, if the example of 1918 is any guide, in the year following the pandemic, a record number of people would apply for new life insurance policies, vividly convinced of the value of owning life insurance,” said Weisbart.
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