The Emerging Risks Team at Lloyd’s have recently published a report on the insurance impacts of a pandemic which explores whether or not the world is better prepared to face the next major pandemic. The report references the 1918 ‘Spanish Flu’ pandemic, which was spread by the demobilisation of troops, and some estimates believe it led to 100 million deaths, more than the First World War itself. The report considers whether this event is truly a worst case.

There are many reasons to believe the world would be better off: better drugs, better communications; models of disease spread; a healthier population and a co-ordinated response from the World Health Organisation backed up by International Health Regulations. But there are also reasons for doubt. Just-in-time supply chains used by many industries including hospitals may not be robust, particularly if they are spread across several countries; global travel far exceeds levels in 1918 and can rapidly spread disease; we have a much larger global population (nearly 3.5 times the level in 1918) and more people live in cities in which the pandemic can spread quickly.

I have a concern that most of the discussions around a pandemic relate to the flu (particularly H5N1) because, while this is the pathogen causing the most concern at present ,it is not the only possible pandemic. Others include: Hendra Virus, Cholera, Tuberculosis, Ebola, MRSA and SARS. It is important that pandemic preparedness plans do not over optimise to one scenario and are robust to many.

The report considers the scenario of a major pandemic which causes a recession (as many fear would happen) and then various experiments to consider how insurers may be affected.  

In scenario planning it is useful to consider possibilities, even if they are felt to be unlikely.  Directly affected insurance classes might include: General Liability, D&O, Employers’ Liability, Medical Malpractice, Event cancellation and Travel insurance.  However, secondary effects might also occur. For example, at the height of a pandemic the number of available tradesmen may temporarily be lower than usual (they may be sick, or just not want to go into other peoples homes). In this case, traditional claims resulting from burst water pipes, storm damage to roofs, etc, may take longer to fix; and usually claims that last longer cost more. 

While these secondary impacts are unlikely to damage the capital of insurers they will be an unwanted drain on profitability.

We hope the report is useful for professionals within insurers that are considering emerging risks.  If the impacts considered in this report were not envisaged at the time of writing a policy then contract certainty is key. Inner limits for pandemic losses may help to contain exposure.