The Lloyds Report: A Closer Look

# 2396

Yesterday Lloyd's Insurance issued a pandemic impact report for the Insurance industry, which can be downloaded here.

The executive summary (listed below) gives a pretty good overview of the risks, as seen by the Insurance industry, of a pandemic. There are 5 points to this summary. After which I'll provide a little commentary.

EXECUTIVE SUMMARY

1. A PANDEMIC IS INEVITABLE With historic recurrence rates of 30-50 years it is prudent to assume that a pandemic will occur at some point in the future. The severity of such events is highly variable; some estimates suggest the most severe to date, in 1918, killed up to 100m. Many pandemics affect the old and young; but some (including the 1918 event) can, perversely, affect the most healthy.

2. 1918 MAY NOT BE THE WORST CASE It is certainly true that the 1918 event was extreme relative to other pandemics in history. However many published “worst case” scenarios take 1918 as a base. There is a danger that we over optimise to this one scenario. There are other forms of pandemic than influenza, some have higher case mortality. Pandemic preparedness should consider a range of scenarios to ensure plans are appropriately flexible.

3. ECONOMIC IMPACTS MAY BE SIGNIFICANT A repeat of the 1918 event is expected to cause a global recession with estimated impacts ranging from 1% to 10% of global GDP. Most industries will be affected, some more than others. In particular, industries with significant face to face contact will be impacted significantly. Insurers investment assets may be affected depending on the mix held. Wider economic and social effects may lead to secondary forms of loss for insurers.

4. MANY INSURANCE LOSSES ARE POSSIBLE For some classes of business such as, life and health it is clear that the impact will be adverse. For other classes of business it is less clear but many forms of liability covers including general liability, D&O, Medical Malpractice as well as specific products offering business interruption and event cancellation could be triggered. Inner limits for Pandemic losses (vertical and sideways) may help to contain exposure.

5. SECONDARY IMPACTS MAY OCCUR Events causing significant global and societal turmoil can give rise to considerable secondary impacts. It is far from clear which of these, if any, would occur; but for resilience planning purposes it is worth considering them. For example the lawlessness experienced in New Orleans after Katrina could
be repeated if police services are affected. Traditional claims such as fire loss may be exacerbated if fire emergency services have depleted efficiency and if tradesmen are in short supply.

When it comes to risk assessment, Lloyds is about as authoritative as they come. In five paragraphs they have essentially echoed the same message that experts like Dr. Michael Osterholm of CIDRAP and HHS Secretary Michael Leavitt have been giving for years.

A pandemic is inevitable. And it could be very bad.

We'll take these points one at a time, and try to add a little value.

1. A PANDEMIC IS INEVITABLE

Interestingly, the Lloyds report takes pains to point out that while we worry about an influenza pandemic the most, there are other candidates out there that could spark a pandemic (or at least an epidemic).

They list:

Hendra Virus
Nipah Virus
Cholera
Small Pox
HIV/AIDS
Bubonic Plague
Tuberculosis
Lassa fever
Rift Valley fever
Marburg virus
Ebola virus
Bolivian hemorrhagic fever
MRSA
SARS

I could add Dengue, Chikungunya, and of course Virus X, the one we don't know about yet, to this list.

Influenza, however, is (for now) the most easily spread of these diseases, and remains our main focus. Should a mutation occur, one that allows Ebola, or Marburg, or Lassa fever to spread more easily, it would change the playing field considerably.

I addressed many of these other emerging pathogens in my blog It Isn't Just Bird Flu.

The take home message is, ready or not, another pandemic will occur.

2. 1918 MAY NOT BE THE WORST CASE

Most `official planning' uses the Spanish Flu of 1918 as the presumed `worst-case scenario'.

For health officials, who must often `sell' the idea of preparing to their government, or their community, 1918 is something they can point to as both relatively recent and reasonably well documented.

But privately, many health officials admit that 1918 isn't the worst-case scenario. If you need `official evidence' of this, simply look at the HHS's Pandemic Severity Index.

Figure A. Pandemic Severity Index

Category 5, starts at a 2% Case Fatality Ratio (CFR) and goes up - with no ceiling indicated. Just an arrow.

In the United States, the 1918 pandemic was a low Category 5 pandemic. Roughly a 2% CFR. In other parts of the world, the CFR was much higher. Some estimates put the CFR in India at over 15%.

There are reasons to believe that the H1N1 virus, the cause of the Spanish Flu, might have circulated in the mid-to-late 1800's. And that at least some - mostly elderly - people had some immunity.

If true, this could have moderated the effects of the 1918 pandemic.

The H5N1 virus currently kills more than 50% of its known victims. Whether this virus will ever become a pandemic, or what its CFR will be if it does, is unknown.

But even a moderately severe pandemic, something even less than we saw in 1918, has the capability of killing tens of millions of people and disrupting economies, and societies, worldwide.

3. ECONOMIC IMPACTS MAY BE SIGNIFICANT

Yesterday the World Bank issued a revised estimate of the impact of a `severe' pandemic. They estimate that such an event could cost the world 4.8% in gross domestic product, resulting in a loss of $3 Trillion dollars.

Lloyds puts the loss at anywhere from 1% to 10% of gross GDP, assuming a 1918 scenario - but also reminds us that 1918 is not the worst possible case.

Either scenario would indicate a severe, and possibly prolonged, global recession.

As the World Bank report points out :

Given the tremendous uncertainties surrounding the possibility and eventual nature of a pandemic inflation, these simulations must be viewed as purely illustrative. They provide a sense of the overall magnitude of potential costs. Actual costs, both in terms of human lives and economic losses, are likely to be very different.

An understandable caveat, given the number of variables involved.

For the average individual, the most important economic indicator is whether they have a job, and are able to pay their bills.

Absenteeism is forecast to run as high as 40% during the height of a pandemic. This number, like so many others, is a pure `guesstimate'. Much will depend on the severity of any pandemic.

Many businesses may find they are unable to remain open during a pandemic wave (which could last weeks or even months).

Their business model may depend on large gatherings of people (theatres, sports arenas, restaurants) that could be outlawed during a pandemic, or they may be dependent upon a supply chain for goods and services that may not be available.

Even if their employees were willing to work, they may not be able to. The HHS gives this sobering advice on their pandemic planning page:

Being Able to Work May Be Difficult or Impossible

Find out if you can work from home.
Ask your employer about how business will continue during a pandemic. (A Business Pandemic Influenza Planning Checklist is available at www.pandemicflu.gov/plan/business/businesschecklist.html.)
Plan for the possible reduction or loss of income if you are unable to work or your place of employment is closed.
Check with your employer or union about leave policies.

4. MANY INSURANCE LOSSES ARE POSSIBLE

Since this report was generated for the Insurance Industry, it is understandable why this would be a major point in their summary. But even for those of us not in the Insurance Industry, this has a major impact.

The ability of many businesses to recover, and resume operations, after a pandemic will depend in part on the insurance industry. Not all pandemic losses will be covered by insurance, of course. But some will be.

It doesn't take Clarence Darrow to figure out that there will be a mountain of post-pandemic litigation as well. A business that today ignores the recommendations of OSHA or the HHS to prepare their workplace for a pandemic could well find themselves facing a jury after a pandemic.

To mitigate losses during a pandemic, it is only prudent to prepare today.

5. SECONDARY IMPACTS MAY OCCUR

An understatement, if ever there was one.

But much like trying to estimate the economic impact of a pandemic, calculating the secondary impacts is pretty much a foray into speculation. The range of reactions by communities during a pandemic are likely to to run the gamut from A to Z.

Some will come together, others will fall apart.

It is my contention that the better prepared communities are the more likely they are to endure and prevail during a pandemic crisis.

While local governments can do much to help during a crisis, core preparations must be made in advance by individuals, businesses, and local organizations.

A recent report from the Johns Hopkins Berman Institute of Bioethics entitled Ethics and Severe Pandemic Influenza: Maintaining Essential Functions through a Fair and Considered Response, included the following snippet:

. . . individuals and families who can afford it should do their best to prepare for any disaster. The paper notes, the more initiative the general public exercises in stockpiling several weeks' worth of food, water, paper goods, batteries medicines, and other needed supplies, the less vulnerable they will be to a break in the supply chain.

It is important for leaders to communicate to the middle class and the wealthy that it is their responsibility to prepare for self-sufficiency in order to free up scarce supplies and allow first responders to direct their attention towards those too poor or vulnerable to prepare themselves.

A clarion call to prepare, if ever there was one.

To that end, the HHS's pandemicflu.gov site is the best one-stop shopping place for flu information on the web. For preparedness information,I know of no better place to start than GetPandemicReady.Org. Their website is filled with essential, but easy to follow, preparedness advice.

The document, Community Strategy for Pandemic Influenza Mitigation

(PDF - 10.3 MB), outlines in great detail the steps that will be required to reduce the spread of a pandemic virus in our communities. It is required reading for anyone interested in mitigating a pandemic.