In 1918, the influenza virus caused a pandemic, leaving more than 20 million people dead. Pandemics have occurred throughout history and appear to be happening with increasing frequency.
Today, the current threat is from Coronavirus, also known as Covid-19. It has not yet been declared a pandemic by the World Health Organisation (WHO), but stands at three out of six on the pandemic scale, meaning that a pandemic could be declared if cases continue to rise.
A repeat of the 1918 pandemic is expected by many to lead to a major global recession, reducing the global GDP between 1% and 10%. Most industries will be adversely affected, with the biggest damage occurring to travel companies, airlines, restaurants and bars, hotels and the entertainment industry.
However, it is important to remember that past pandemic events like the 1918 influenza crisis occurred at times when the global economy was very different from today, meaning that it is difficult to ascertain exactly the financial consequences of a pandemic in the 2020s.
Economic consequences of the SARS outbreak
If we are unable to compare possible financial losses to those that occurred during the 1918 influenza pandemic due to the difference in the economic landscape, perhaps we can make more accurate predictions by comparing the coronavirus with SARS.
According to a report by Trust for Americas Health, the 2003 SARS outbreak that lead to 774 deaths caused a 66% reduction in travel arrivals to Hong Kong. Cinemas in the region lost out of 50% of their revenue, and the Asia Pacific as a whole lost USD 40bn during the outbreak. The disease also caused hotel revenues to decrease by around 40%. Since then, insurers have been more cautious about covering such risks. Many insurers now place exclusions on flu-type outbreaks.
Impact on the insurance industry
Insurers are major investors and a global recession would impact on the investments they hold. Some expect there to be a ‘flight to quality’, where investors switch from riskier to safer assets. Corporate bond spreads may widen, while risk-free interest rates would fall in line with a flight to quality. A global recession means that there would be fewer economically active stakeholders, leading to a reduced demand for insurance. Premium income will be reduced yet many overheads will remain. Offsetting this, a reduction in available capital could result in a hardening of premium rates.
Research from various life insurers and reinsurers suggests that in the life and health sector, profitability will be damaged for several years after the outbreak, although capital is expected to be able to withstand this. The “natural hedge” against a rush of life assurance claims is that annuity payments may cease earlier than expected (due to premature death of the annuitant). This is not certain to be effective. In 1918, the pandemic affected those of working age and was little worse than a “normal” winter flu for the elderly, meaning that this sort of hedging should not be relied upon. Some reinsurers for the general insurance markets also offer life reinsurance and their profits may decrease at a time when P&C cedants are also looking to claim.
Even without the occurrence of a pandemic, three major insurance areas are already being affected by the coronavirus : travel insurance, business insurance and life insurance. According to a report by the Financial Times, it is too early to say how much they virus outbreak will cost the insurance industry.
However, some predictions can be made. Travel insurance claims are expected to sharply increase due to cancelled trips, companies that experience disruption will expect their insurers to absorb the financial losses, and life insurers will see a spike in claims as the death toll associated with the coronavirus increases.
Are we better equipped to deal with a pandemic situation today?
Some researchers have argued that the impacts of historical pandemics would be reduced if they reoccurred today. We have better drugs, and influenza models have been developed by many stakeholders, including the insurance industry, helping to plan in case of another pandemic.
The WHO would coordinate a global response to the pandemic, similar to the success story of the 2013 SARS outbreak. We also have improved communication methods to better inform the public, and an overall healthier population in the developed world.
However, others believe that the impact could actually be worse in today’s society for a variety of reasons, many linked to globalisation. Many businesses are now part of a global network of suppliers and clients. Goods and materials, including food, are transported globally, potentially carrying pathogens. The “just in time” model of some businesses may lead to shortages of particular medicines or even food. Global travel is also a big factor, allowing the easy spread of disease.
The world’s population has also significantly increased, standing at 7.8 billion and going up by more than 90 million per year. This means that the potential pool of those infected has grown. Moreover, people are now more concentrated in cities rather than being dispersed in rural areas. Pandemics can spread quickly within cities due to density of population and large numbers commuting. There are also larger pools of those with compromised immune systems, for example those with AIDS, meaning that greater numbers of deaths are more likely.
The 1918 influenza outbreak is often used as a worse case scenario, and other outbreaks are measured against it. If a pandemic comparable to 1918 occurred today, the economic consequences would be severe and the world would be plunged into a recession.
Many types of business would be affected by a pandemic scenario, including life and health insurance. Depending on policy wordings and legal judgements, General Liability, Medical Malpractice, D&O and Event Cancellation policies may also be affected. Secondary forms of loss are also likely, particularly due to the general economic and social impacts of a pandemic situation. Insurers should plan for many different scenarios, including where the emergency services are no longer 100% efficient.
Insurers typically calculate their capital requirements by taking different risks into account. This will be helpful in planning for a pandemic, as the global event will likely impact more than one risk area simultaneously. These risk areas include investment market risk, insurance risk, credit risk, operational risk, liquidity risk and group risk.
To be as prepared as possible for a pandemic situation, cooperation between governments, businesses, healthcare and local communities is key.