An Insurance Perspective on Epidemics and Pandemics

September 2016    |    By Indrani Nadarajah

Abstract: Epidemics and pandemics have been a part of human history – the plague of Justinian in 541; the Black Death of the 14th century; and the 1918 Spanish Flu were disease outbreaks that killed millions. Unfortunately, as pandemic risk is expected to increase as the world gets more crowded, for the most part, governments are ill-prepared to deal with the economic and social impact of such events. The 2015 Ebola Outbreak in West Africa, a situation that swiftly deteriorated partly because of the slowness of the international response, has prompted the World Bank to institute a pandemic funding facility to help poorer countries deal with the economic losses caused by pandemics. As pandemics like the Zika virus continue to travel across continents, some insurers are also launching new products to deal with this increasing risk.

The World Health Organization defines an epidemic as affecting a large number of people within a population, community, or region, and a pandemic as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people”. Over the past 15 years, the world has experienced several infectious disease crises -- Ebola, Middle East Respiratory Syndrome (MERS), severe acute respiratory syndrome (SARS), and H1N1 (colloquially known as swine flu).

Increasing Risk

The world’s population is projected to reach 9.7 billion by 2050, overwhelming already overcrowded cities and towns that have rudimentary infrastructure and healthcare facilities. Deforestation will be a continuing problem as forests are cleared to make way for agriculture, bringing humans into more direct contact with disease-carrying wild animals. 

Climate change, with warmer weather patterns and heavier rainfall, is also contributing to the spread of certain disease vectors, like the Aedes mosquito, and ticks.

Boston-based catastrophe risk modelling firm AIR Worldwide has expanded its global pandemic model to include outbreaks of six additional diseases. The model now accounts for nine pathogens, in addition to the previously modelled influenza, coronaviruses (responsible for diseases like SARS and the Middle East Respiratory Syndrome), and filoviruses (including Ebola and Marburg). 

Climate Change

Nearly 75% of all new, emerging, or re-emerging diseases affecting humans at the beginning of the 21st century are zoonotic, which means they originated from animals. These include AIDS, SARS, H5N1 avian flu and the H1N1 flu. Increasing numbers of wild animals, which may have carried diseases for years, are coming into contact with humans, often because of deforestation. A warming climate and heavier rainfall is also helping the Aedes mosquito, which transmits the Zika virus, to become more widely spread than before. 

Contagious diseases are on the increase as a result of the impacts of rapid “demographic, environmental, social, technological and other changes” in society. A number of diseases known to be climate-sensitive, such as malaria, dengue fever, West Nile virus, cholera and Lyme disease, are expected to worsen as climate change results in higher temperatures and more extreme weather events. 

In 2012, an international team of researchers reported that 13 zoonotic diseases are responsible for 2.2 million human deaths every year. The study also showed that the vast majority of these illnesses and deaths occur in low- and middle-income countries. For example, Ethiopia, Nigeria and Tanzania, along with India, had the highest rates of associated illness and death from zoonotic diseases. 

Zika Virus

The Zika virus, which threatened to derail the 2016 Rio Olympics, is primarily transmitted to people through the bite of an infected Aedes mosquito. The Centre for Disease Control (CDC) reports that sexual transmission of the virus is also possible. 

The first large outbreak of disease caused by the Zika infection was reported from the Island of Yap (Federated States of Micronesia) in 2007. In July 2015, Brazil reported an association between the Zika virus and Guillain-Barré syndrome. In October that year, Brazil reported an association between the Zika virus and microcephaly, a neurological birth defect where infants are born with significantly smaller heads than normal.  

While the World Health Organization has now officially confirmed that there were no reported cases of Zika among travellers or athletes at the Rio Olympics, new research has been published warning that two billion people could be at risk of Zika in Africa and Asia. Populations in India, Indonesia and Nigeria are some of the most vulnerable to transmission, the researchers said. The research team, from the London School of Hygiene and Tropical Medicine, Oxford University and the University of Toronto, also warned that "vast numbers" of people were living in environments where it would be hard to prevent, detect and respond to the virus. 

The Zika virus has now been found in certain parts of the US, with the CDC confirming 18,611 cases at the end of August, 2016. Of this, 2,940 cases are in the continental U.S. and 15,647 cases in Puerto Rico, the U.S. Virgin Islands and American Samoa. 

As of September 8, 2016, 250 travel-related cases, two sexually transmitted cases and two reports of maternal-to-fetal transmission have been detected in Canada. 

Singapore recently reported 41 cases of the Zika virus. Singapore said there were "ongoing local transmission" cases in Indonesia, Thailand and Vietnam. Other Asian countries that have detected the Zika virus since 2013 include Bangladesh, Cambodia, Laos, Malaysia, Maldives and the Philippines.  

The Economic Cost of Epidemics and Pandemics

Modern society seems ill-prepared to deal with the havoc that widespread infectious disease outbreaks inflict. The Ebola epidemic of 2014/2015, which infected an estimated 29,000 people, and killed over 11,300, highlighted gaps in the communication and treatment chain. For example, it took too long to identify the outbreak in the community and raise alerts; and local health systems, which were often very basic and short-staffed, were quickly overwhelmed and shuttered their doors. There were also reports of the dead being left in the streets with no one to bury them. These problems were aggravated by the international response, which was slow and poorly coordinated.

The Ebola epidemic cost an estimated US$10 billion -- more than US$7 billion in international aid and US$2.2 billion in gross domestic product losses in the West African countries of Guinea, Libya and Sierra Leone (World Bank estimates). 

Pandemics are indeed very expensive affairs. In developed economies with high insurance penetration, the closure of public areas like cinemas and restaurants, public transport systems and even grounded flights can result in massive claims for p&c insurers that write business interruption cover. 

A report released in January, 2016 by the Commission on a Global Health Risk Framework for the Future, calculated that the estimated global economic loss from potential pandemics could average more than US$60 billion per year. The report, The Neglected Dimension of Global Security: A Framework to Counter Infectious Disease Crises recommends an investment of approximately US$4.5 billion per year, or 65 cents per person. About US$3.4 billion of this investment would be channelled towards the upgrading of public health infrastructure in poorer countries, and an additional US$1 billion per year would fund research and development. The remainder, or US$100 million, would be used to strengthen the World Health Organization’s capabilities and the funding of WHO and World Bank contingency funds. 

“Nations devote a fraction of the resources to preparing, preventing, or responding infectious disease crises as they do to strengthening national security or avoiding financial crises,” the Commission pointed out in a press release, noting that “few other risks pose such a threat to human lives, and few other events can damage the economy so much”, notes the report.

To prod countries to beef up their pandemics preparedness, the Commission also recommended that the International Monetary Fund include pandemic preparedness in its assessments of countries’ economic performance and policy. Such evaluation would allow financial markets to better account for such risks.

Pandemic Emergency Financing Facility

In January, 2016, primarily prompted by the chaotic global response to Ebola, the World Bank launched a US$500 million, fast-disbursing insurance fund to combat deadly pandemics in poor countries, creating the world’s first insurance market for pandemic risk. 

The bank estimated that had the facility existed in mid-2014, about US$100 million could have been mobilized as early as July of that year to severely limit the spread and severity of the Ebola epidemic. Instead, it took three months for that sum of money to begin flowing, which was ample time for the outbreak to significantly worsen.

“The recent Ebola crisis in west Africa was a tragedy that we were simply not prepared for. It was a wake-up call to the world,” World Bank president Jim Yong Kim said.

The facility was developed in conjunction with the World Health Organization, and with Swiss Re and Munich Re acting as insurance providers. It will also combine the proceeds of World Bank-issued catastrophe bonds. Japan has committed the first SU$50 million towards the fund.

The Pandemic Emergency Financing Facility (PEF), modelled by AIR Worldwide, is limited to certain classes of infectious diseases, including several types of influenza, respiratory diseases like SARS and MERS, and other viruses including Ebola and Marburg. The Zika virus is not included in the insurance scheme, but funds for Zika and other diseases that could lead to pandemics would be available separately, which is likely to be in the US$100 million range, the Bank announced. 

To trigger PEF financing, an outbreak must meet the following specific criteria:

1. Outbreak size (number of cases or deaths),
2. Outbreak growth (the outbreak must be spreading over a defined time period) and
3. Outbreak spread (two or more countries affected by the outbreak). 

When the above criteria are met, the affected countries and/or eligible international responders may submit a funding request from the PEF.

The World Bank Group’s Board of Executive Directors approved the establishment of the PEF on May 3, 2016, and the facility is expected to be functional by the end of the year.

President Kim hopes the new facility would spur development of a market for pandemic risk, similar to that for natural catastrophe risk since the 1990s (Cat bonds first emerged after the losses of 1992’s Hurricane Andrew).

African Risk Capacity Agency

A unit of the African Union is also developing outbreak and epidemic insurance for African nations following the Ebola outbreak. The African Risk Capacity (ARC), a disaster risk insurer that launched in 2014 to help member states become more resilient to extreme weather catastrophes and to protect food-insecure populations, is collaborating with a California-based company, Metabiota. This new product uses real-time data collection and risk analytics for epidemics, to develop suitable insurance products.

The facility is targeting to launch the Sovereign Insurance Cover for Disease Outbreaks and Epidemics in 2017. So far, US$150 million dollars has been earmarked by the US, Germany, France, Canada and the UK, for the African Risk Capacity (ARC) Agency as a specialized agency of the African Union (AU). 

Pandemic Characteristics

While infectious disease is a natural hazard, a pandemic is not. In a 2014 background paper on pandemic risk, a World Bank official writes that a pandemic is a largely man-made disaster, which is most often caused by inadequate attempts to halt the spread of disease (as demonstrated so strikingly in the West African Ebola outbreak). Many developing countries that increasingly take part in global trade and travel do not yet have the veterinary and human public health capacities to identify and arrest infection early. It is this capacity gap that is a source of pandemic risk.

Furthermore, focusing on health impacts alone is not enough. While it is undeniable that sections of a population can become ill and can die, a pandemic’s reach can also hurt an economy. Here are just two examples:

In 2003, the SARS outbreak (which was stopped after 8,000 cases and 800 fatalities) gave rise to economic losses of US$54 billion worldwide. This figure was much higher than the medical costs of treating infected patients. 

In 2015, South Korea reported that 100,000 potential visitors cancelled trips to the country, costing about $90 million in lost revenue after news of the country’s battle with the MERS virus was revealed. South Korean exports were also affected, with the economy only growing 0.3% in the second quarter of 2015; a six-year record low. 

Despite the growing concern for pandemics many governments still do not view the impact of a pandemic in its totality and end up neglecting policies and actions that would increase a society’s resilience, the World Bank notes. Some 60% of an epidemic/pandemic’s impact would be due to a shift in demand and supply, driven by people’s desire to avoid infection and by quarantine measures. Basic services like primary healthcare, transportation and schools would be severely reduced or shut down. The other major driver of costs (about 28%) would be lost production due to worker absenteeism. On its own, the health sector cannot undertake an adequate level of pandemic risk management for influenza and similar highly-transmissible diseases, the World Bank argues. There has to be a whole-of-government approach. 

While substantial international and domestic energies are harnessed to limit the spread of an epidemic or pandemic, very often, after the crisis is over, political will wanes and funding dries up. For example, while most developing countries did succeed in controlling the H5N1 avian flu, the H5N1 virus is still circulating in some poultry farms in Asia and Northeast Africa. “The capacities to address this threat and prevent pandemics that were created to respond to the H5N1 avian flu are increasingly not being maintained, so that they will degrade,” The Bank writes on page 22 of its report. 

Problems with Data Collection

Data collection and analysis are critical when devising programs and tracking progress. However, healthcare workers have reported that it is “extremely challenging” to develop feasible methods for collecting accurate, reliable, and meaningful data during a public health emergency. At a workshop in the US assessing the response to the 2009 H1N1 influenza vaccination campaign, participants (namely US health professionals) noted that data collection was always secondary to providing immediate care, as the aim was to vaccinate/treat as many people as possible.  

Participants were also hesitant to press for detailed information for fear of putting off potential patients, “For this reason, it is important to consider data collection and analysis needs during a pandemic as preparedness plans are developed and revised so they can be fully integrated into the plans and included in exercises and drills,” the workshop recorded.

New Product Offerings

The issue of epidemics is addressed in life insurance, but such risks are usually excluded in p&c insurance. Munich Re has joined forces with Metabiota to help develop models and insurance solutions in p&c insurance to mitigate the economic losses caused by epidemics. “The solutions will support the recovery of national economies and businesses, enabling individuals to return to normal life,” Munich Re announced in February, 2016. 

Bermuda-based AXIS Capital Holdings subsidiary AXIS Healthcare has launched a new medical catastrophe business interruption product for hospitals in Canada and the US to protect against a loss of revenue caused by a contagious disease outbreak. The product includes coverage for any disease that is transmitted by direct or indirect contact and includes bubonic plague, Legionnaires’ disease, MERS, SARS, HIV, Ebola, influenza, and lesser-known viruses or plagues. “The new product would also provide coverage for diseases that have not yet been discovered by science, or a disease that could mutate into a pandemic at some point in the future,” AXIS Healthcare added in the release.

Axis cited the experience of Texas Health Presbyterian Hospital Dallas, where inpatient days dropped 22% and emergency room visits plunged 49% in the month after it admitted the first Ebola patient in the US. The event cost the hospital US$20.3 million in direct revenue.

Conclusion

Today, a variety of diseases have the potential to develop into global threats. Other than the Zika virus, the MERS virus and dengue fever are still poorly understood. Like Zika, dengue is spread by mosquitos that have adapted to urban environments, and as globalization and deforestation continues, more populations will be exposed to these risks.

The world has been poorly prepared to deal with a serious pandemic. Pandemics are considered a man-made disaster due to inadequate attempts to halt the spread of outbreaks, yet the industry is only now developing solutions to address and mitigate these risks, like the AXIS Healthcare business interruption product for hospitals. Without adequate investment in public health, the risk of epidemics to human life and economic activity will increase.

In recognition of society’s vulnerability to infectious diseases, global institutions like the European Commission, the World Bank, the WHO and various governments have begun endorsing the “OneHealth Approach” which recognizes that “the health of humans, animals and ecosystems are interconnected.” This approach was instigated after the 2005 avian flu outbreak.

While it may be difficult to predict when and where the next pandemic will happen, it is important for the global p&c insurance industry to continue to support these global institutions with modelling, prevention strategies and insurance products that can help protect more lives and economic disruption.