Transcript Canadian Institute of Actuaries L’Institut canadien des

2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Canadian
Institute
of
Actuaries
L’Institut
canadien
des
actuaires
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Pandemic Scenario
By Richard Houde
September 25, 2008
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Pandemic Scenario Research Paper
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The objective: Provide information to
members about:
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Existing pandemic research and models
Factors/parameters to consider in the
development of pandemic scenarios
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Why a Pandemic Scenario?
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Pandemics are still unpredictable events
(occurring at 10 to 50 years intervals)
Pandemics are plausible events that can
threaten the financial conditions of
insurance companies
Pandemics will impact many risk
categories considered in DCAT and form
interesting examples of integrated
scenarios
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Pandemic Scenario Presentation
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What we know about pandemics
General considerations in development of
pandemic scenario
Considerations specific to DCAT risk
categories
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
What is a Pandemic
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Global outbreak of a disease caused by an
agent (virus or bacteria) new to the
population (or long absent from the
population)
The agent infects humans causing serious
illness
The agent spreads easily and sustainably
from person to person
2008 Seminar for the Appointed Actuary
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WHO’s Epidemic and Pandemic
Alert and Response (EPR)
Diseases covered by EPR
Anthrax
Avian influenza
Crimean-Congo HF
Dengue HF
Ebola HF
Hepatitis
Influenza
Lassa fever
Marburg HF
Meningococcal disease
Plague
Rift Valley fever
SARS
Smallpox
Tularaemia
Yellow fever
2008 Seminar for the Appointed Actuary
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Influenza Pandemics (or probable
pandemics) 1500-1900
Year(s)
1510
1557
1580
1729-1730
1732-1733
1781-1782
1788-1789 (?)
1830-31
1833
1836-37
1889-1890
1899-1900
Years since
previous pandemic
47
33
149 (?)
2
48
6
41-48
2
3
52-56
9
Origin or
first report
Africa
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Asia, North Africa
Russia (?)
Russia
Russia, China (?)
Russia
Russia, China
Russia
Russia (?)
Russia
Unknown
Viral
Type
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
Unknown
H2N2
H3N2
2008 Seminar for the Appointed Actuary
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Influenza Pandemics of 20th Century
Years
1918-1919
1918-1920
(Spanish flu)
Years since
Origin or
previous pandemic first report
Viral
Type
Estimated Estimated US Excess US Clinical
global deaths US deaths mortality Attack Rate
(millions) (thousands) per 1,000
(%)
18
France, US
H1N1
40-50
20-100
500-550
660
5.3
6.0
25
1957-1958
(Asian flu)
37
China
H2N2
1-2
70
0.4
31-35
1968-1969
(Hong Kong flu)
10
China
H3N2
1
34
0.2
21
2008 Seminar for the Appointed Actuary
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General Considerations
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Clinical attack rate
Demography
Regional / Country specific
characteristics
Changes since prior pandemics
Differences between general and insured
populations
Pandemic duration
State of business continuity planning
2008 Seminar for the Appointed Actuary
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Clinical Attack Rate
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Typical range: 25% to 35%
Accurate figures harder to find than
death rates
Varies by age
2008 Seminar for the Appointed Actuary
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Demography
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Age structure
Pre-existing immunity
2008 Seminar for the Appointed Actuary
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Regional/Country Specific
Characteristics
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Underlying health of population
Travel
Preparedness and capacity to face pandemics
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Health system characteristics
Pharmaceutical stocks
Pandemic plan and surveillance
Capacity to implement contact modification
and travel restrictions
2008 Seminar for the Appointed Actuary
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Changes since prior Pandemics
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Older population age structure now
Antibiotics (penicillin 1928)
Virological research and knowledge
(influenza 1933)
WHO’s global surveillance network (1952)
Influenza vaccines (1950s)
Antiviral drugs (1970s)
2008 Seminar for the Appointed Actuary
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Changes since prior Pandemics
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Better medical treatments (ICUs, ventilator and
intravenous fluid support, etc.)
Fewer outbreaks of contagious disease,
including tuberculosis
Improved communication and coordination
Greater population density
Increased travel
Lower overall mortality (despite older age
structure)
2008 Seminar for the Appointed Actuary
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Insured vs. General Population
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Lower mortality for insured population
due to:
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Underwriting
Economic self selection
Actively at work (group insurance)
2008 Seminar for the Appointed Actuary
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Mortality Risk
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Excess mortality curve: flat, “U”, “V\”, or “W”
shape?
Coherent scenario for all product lines
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Gain on payout annuities may partly offset loss from
death claims
Testing multiple curves: most adverse will
depend on product and age mix
Insured vs. general population mortality
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Scarce evidence of lower excess mortality during
1918 pandemic
SOA Study using the Delphi Method
Differences between annuities, individual life and
group life
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Mortality Risk
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Combined effect of excess mortality and
asset depreciation for GMDBs and Seg
Fund guarantees
Post-pandemic mortality
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Survivorship echo theory: mortality
improves after death of weaker lives
Opposite view theory: heavier mortality due
to weakening of infected survivors
2008 Seminar for the Appointed Actuary
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Mortality Risk
Global Excess Mortality Rate per 1,000
Model
General Population
Insured Population
Number
Number
Sum
Insured
Ratio
Insured/General
NAAR
SOA (US 2007)
Potential impact…
- Moderate - "U" Curve
'(comparable to 1957)
0.7
IL
GL
Total
0.45
0.32
0.38
0.3
0.27
0.29
57.1%
(0.4)
- Severe - "V\" Curve
'(comparable to 1918)
6.5
IL
GL
Total
4.38
5.19
4.79
5.22
5.46
5.31
76.9%
(5.0)
EACG (Europe, 2006)
Actuarial reflections…
- Worst-case-flat curve
2.5
1.5
60%
Gen Re (Germany, 2006)
Pandemic Influenza: …
- Severe - "V\" Curve
(comparable to 1918)
6.4
IL (?)
4.8
4.1
5.1
100%
2008 Seminar for the Appointed Actuary
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Mortality Risk
Swiss Re Model (WW, 2007)
Excess deaths per 1,000 assuming 1 pandemic every 30 years
(age weighted to represent insurance portfolio)
1-in-200-years event
(99.5th percentile)
1-in-100-years event
(99th percentile)
Canada, Australia, N-Z
0.7
0.3
Switzerland
USA
UK
1.0
1.0
1.1
0.5
0.6
0.5
South America
China
1.5
1.7
0.8
1.0
South Africa
India
2.5
2.5
1.2
1.4
Note: Ratio Insured/General population mortality = 100%
2008 Seminar for the Appointed Actuary
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Morbidity Risk
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Disability Income products
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Health insurance
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Increase in incidence rates for plans with short EP
Increase in termination rates due to excess mortality
Increase in hospitalizations and prescription drugs
Effect expected to be much smaller than
mortality
Resources
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CDC Pandemic Influenza Resources Website
“The Economic Impact of Pandemic Influenza in the
United States: Priorities for Intervention” by Meltzer,
Cox and Fukuda
2008 Seminar for the Appointed Actuary
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Persistency & Lapse Risk
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Temporary increase in persistency for
insurance products
Temporary increase in policy loans or
partial withdrawals from UL policies
Temporary increase of surrenders for
savings type products
Temporary increase in group business
persistency as groups lacking resources to
go to market
2008 Seminar for the Appointed Actuary
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Cash Flow Mismatch Risk
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Sharp increase in claims and
withdrawals from UL policies and
savings products may create unexpected
mismatch
Increase in claims and withdrawals may
be somewhat offset by increase in
persistency of insurance products and
increase in new business
2008 Seminar for the Appointed Actuary
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Deterioration of Asset Values
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Wide belief that pandemic will affect negatively the
global economy
Effect will depend on duration, infection and death rates
Source
Scenario (death rate)
Economic Effect
U.S. CBO (2006)
Severe
Mild
0.75%
0.03%
US GDP - 4.25%
US GDP - 1%
IMF
Severe
0.60%
Global GDP - 2%
Lowy Institute
Severe
Mild
2.20%
0.02%
Global GDP - 10.7%
Global GDP - 0.8%
Oxford Economic
Forecasting
Severe
Mild
Spanish flu
(SARS extended to 6 months)
Global GDP - 5%
Global GDP - 1%
Finance Canada (2006)
Severe
Moderate
0.44%
0.04%
Cda GDP - 0.4 ~ 0.9%
Cda GDP - 0.1 ~ 0.3%
2008 Seminar for the Appointed Actuary
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Deterioration of Asset Values
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Most of the impact on GDP will come
from the demand side (85-90%)
Increase
Health care services
Pharmaceutical
Medical supplies
Funeral services
Non-perishable food
Water
Telecommunication & Internet
Decrease
Poultry industry
Tourism, travel & public transportation
Entertainment & Sports
Restaurants
Retailers of non essential goods
Providers of non essential services
Providers of services that could spread
disease (dentists, hairdressers, etc.)
Construction & real estate
Oil & gas
Financial & insurance services
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Deterioration of Asset Values
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Reaction of capital markets more difficult
to predict
Psychological “flight to safety” reaction:
shift in demand from shares and corporate
bonds to government bonds, gold and
money market
Extent and duration of share price losses
greatly depend on the severity of the
pandemic and its impact on the real
economy
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Deterioration of Asset Values
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Credit spreads surge resulting from sales of
corporate bonds
Price increase on government bond
markets and associated lower interest rates
will probably tend to last longer: central
banks expected to adopt expensive
monetary policy to mitigate the shock,
particularly if there is a trend towards
deflation
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Deterioration of Asset Values
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Possible increase in asset defaults
Results of the “SOA Study of the Effect
of a Flu Pandemic on Economic Values
using the Delphi Method” were
inconclusive
2008 Seminar for the Appointed Actuary
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New Business Risk
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Increase in demand for non face-to-face
sales of term insurance products
Increase in exercises of guaranteed
insurability benefits
Decrease of New Business for Payout
annuities, savings type products and group
business (o/t optional group life)
2008 Seminar for the Appointed Actuary
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New Business Risk
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Company’s business continuity plan and
sales strategy during pandemic
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Level of sales and new business staff
Level of resources to provide evidence
(APS, etc.)
Customers willingness to meet sales people
face-to-face
Post-pandemic level of New Business
2008 Seminar for the Appointed Actuary
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Expense Risk
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Temporary increase in expenses related
to activation of business continuity plan,
e.g. staffing costs to replace sick people
and handle extra claims
2008 Seminar for the Appointed Actuary
Colloque pour l’actuaire désigné 2008
Reinsurance Risks
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Increased risk of reinsurer insolvency
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Greater exposure to mortality risk with no or little
offsetting gains from life annuities or LTD
Reinsurer’s age mix and assumed excess mortality
curve
Rating agencies believe that reinsurers can sustain
pandemic
Reinsurer’s preparedness for a pandemic
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Liquidity of assets and ability to make timely
payments
Ability to support new business
2008 Seminar for the Appointed Actuary
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Reinsurance Risks
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Reinsurance market situation after a pandemic
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Reduction in capacity
Price increase
Reinsurers are normally not very exposed to the
financial market
For reinsurance agreements with profit sharing
(and typically higher margins), reinsurer’s
solvency is improved and loss carry-forward
provisions mean no experience refunds for
cedants in the years following pandemic