Newark, Calif. - In response to a growing insurance industry need, Risk Management Solutions (RMS) completed of a probabilistic model for assessing the risk of influenza pandemics across multiple countries.Many published studies have already illustrated the effects of various pandemic scenarios, most commonly a repeat of the 1918 influenza pandemic that had a mortality level of 0.67% in the U.S. and even more severe effects in other countries. Analysis of the virology and epidemiological science shows that more severe pandemics are possible, and probabilistic estimation of virus characteristics incorporating the recent H5N1 suggests that there is a one in five chance of a pandemic that is more severe than that experienced in 1918.
H5N1, the virus that recently caused avian flu in Asia, has viral characteristics that will increase the likelihood of a virulent pandemic if it provides genetic material for human-to-human influenza transmission. RMS believes that many companies may be underestimating their risk if they assume that the 1918 pandemic is the worst-case scenario. The RMS Influenza Pandemic Risk Model is intended to help insurers assess the losses they will experience from pandemics with all of the different permutations of potential characteristics and outcomes.
"At AIG, we take seriously the threat of an influenza pandemic" says Charles Dangelo, senior reinsurance officer. "The RMS model, based on an innovative science-based framework, will be a useful tool for us as we consider how to best manage our risks."
Although a number of pandemic influenza scenarios have been publicized, effective risk management requires quantification of not only the severity of an event, but also the likelihood of the event occurring. The RMS model incorporates over 1800 pandemic influenza scenarios that take into account such factors as likelihood of the pandemic occurring, infectiousness and lethality of the pandemic, demographic impact, country of outbreak, vaccine production, and national countermeasures.
RMS has been studying influenza pandemic risk since 2004. The development of the RMS probabilistic model has benefited from the input of some of the world's leading authorities on influenza, national preparedness, and infectious diseases.
RMS advisor Neil Ferguson, professor of mathematical biology at Imperial College, London, adds: "Understanding the science is essential to understanding the risk--this is as true for governments as it is for insurance companies in making decisions about how to manage the risk."
"Pandemic influenza could potentially deal insurers a triple whammy, simultaneously causing unprecedented life and health claims losses, investment portfolio downturns at a time when insurers most need liquidity, and reduced staff and management productivity through the spreading of sickness among company personnel," says Dr. Andrew Coburn, RMS project lead on influenza pandemic risk modeling.
"Moreover, influenza pandemics can last two to three years, making it essential for insurers to put in place a multi-year risk management strategy that considers the reinsurance crunch that will likely occur in the event of a pandemic. The RMS model provides a probabilistic assessment of losses to help insurers make decisions on risk transfer and medium-term portfolio management, as well as detailed scenarios for planning short and long-term risk management strategies."
Life and health insurance portfolios are very different than property portfolios. The RMS model enables insurers to incorporate detailed analysis of their own specific portfolio, allowing the characteristics of individual company's policyholders to play an important role in the risk assessment process.
The RMS model addresses insurance applications with the following capabilities:
- Loss Modeling: Complete probabilistic loss assessment (claims costs, fatalities, and illness levels) for 10 countries with major life insurance markets, based on over 1800 pandemic influenza scenarios of varying lethality. Business lines include group & individual life, personal accident, and health.
- Investment Strategy: Asset impacts from losses on the capital markets.
- Business Continuity Planning: Operational productivity losses through staff sickness and office closures.
Another potential application of the model involves securitizations of influenza pandemic risk for companies looking to find capacity in the capital markets. Tanguy Claquin & Alexandre Vigier, executive directors at CALYON Corporate and Investment Bank, comments: "As an additional tool to quantify the risk of catastrophe mortality, the RMS probabilistic pandemic influenza model should be well suited for securitizations purposes. As such, it was much awaited by issuers and financial players."
The new model and its implications for the insurance industry will be presented at an RMS Seminar on the Management of Influenza Pandemic Risk being held June 1, 2006 in New York City. The seminar will feature a guest presentation, 'Understanding the Threat of Pandemic Influenza,' by Professor Marc Lipsitch of the Department of Epidemiology, Harvard School of Public Health. Advance registration and approval by RMS is required. Details and registration information are available at http://www.rms.com/
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