The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

The current strain of flu that’s causing concern is of the H1N1 type; different to the H5N1 strain (or ‘bird flu’) that made the news several years ago.  The new strain is from a mixture of a swine virus, human flu and, in fact, bird flu.

According to the World Health Organization the majority of people will not have immunity unless they work with pigs.  Once a strain is isolated work on a vaccine can begin but this is likely to take several months to prepare. 

In the meantime antivirals (which help to suppress the full effect of the virus) can be prescribed; it appears that oseltamivir and zanamivir are effective.  A key concern is that a virus will have immunity to antivirals; but at the moment this appears not to be the case, which is fortunate.

The current WHO ‘preparedness phase’ has now been raised to level 4.  The WHO is not recommending travel or trade restrictions.  They have already concluded that containment of the outbreak will not be possible because it has already been identified in many locations. They stress that a pandemic is not inevitable but that it is now more likely.

The excellent on line encyclopedia wikipedia once again shows its worth with an article  that shows suspected cases around the world. These are being mapped live (below) and include unconfirmed cases ranging from the US, UK, Spain to New Zealand.

View H1N1 Swine Flu in a larger map

Note that only 45 cases have been laboratory confirmed with another 1807 cases only “influenza like”.  According to the Centres For Disease Control and Prevention there are small number of confirmed cases from the east to west coast of the US (see graphic).

Restricting the view to just Mexico we see 152 deaths out of 2761 cases, which is appears to be a “case fatality rate” of over 5% (compared to 2.5% for the 1918 “Spanish flu” virus which killed tens of millions, though lower than bird flu which is still at a worrying 60%). 

The case fatality is the percentage of people who are ill with the flu who go on to die from it.  It is likely that a number of cases are unreported (whereas deaths are likely to be tracked accurately) so the true case fatality rate is probably lower than the basic statistics suggest; time will tell.  As you can expect there is some conflicting information on numbers with wikipedia showing 50 confirmed cases in the US and the CFC showing 40.

In the event of a major pandemic the insurance industry will potentially have to cope with an variety of claims, while it is still reeling from its own business continuity problems. Life and health insurers will be directly impacted but less immediately obvious losses could arise, from medical malpractice to event cancellation.

One of the key issues raised is that a major pandemic is thought likely to cause a global recession – given the current financial state of the world’s economy a pandemic could not be worse timed.  At present however, there is good reason to hope the impact of this flu will be manageable; we will continue to monitor the situation.

Google explain their work  and provide a link to this paper (pdf) from Ginsberg et al which gives more details (including a brief mention of other similar studies, some of which use Yahoo! data). 

At first look this result might seem quite obvious.  If a region is in the depths of a flu epidemic it’s hardly surprising that more people than average will search for information about relevant symptoms.

The real power of Google’s research is that the information contained in the queries appears to have predictive power.  In other words they can spot an impending epidemic before it happens. 

According to Ginsberg et al the new Google methods can give useful information some two weeks prior to the traditional monitoring methods by the Centre for Disease Control and Prevention (CDC).  They stress that traditional methods still have their place and are not calling for their new methods to replace them. 

However, they hope that their approach could be very useful for medical authorities in planning for an epidemic before it occurs.  I imagine this would enable the early ordering and deployment of antivirals, for example.

They consider how their approach might fare during a pandemic and stress that their method has not been tested in this scenario.  It may be that heightened public awareness of the flu at such a time will invalidate their method (searches by the ‘concerned well’ may swamp those with early genuine symptoms).  However, if their method is useful in such a scenario it could save many lives. 

Lloyd’s Emerging Risks team have produced a report on Pandemics (pdf, 408kb) and are continuing to monitor this subject for developments.

In any case, Ginsberg et al state that seasonal flu, which occurs annually, is still responsible for up to half a million deaths every year, so any reduction in mortality from this cause would be welcome.

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.