The World Health Organisation is predicting a flu pandemic in which more than 7 million people could die. No one knows when or where it will strike, but the message is clear: be prepared. Lauren MacGillivray reports on the implications for insurers.

Insurers are master calculators of risk but even they can’t be sure when the next big pandemic is coming. The statistics are worrying, though. Pandemics tend to strike every 30 to 50 years – and the last one was in 1968.

The regular flu season begins this month and runs until March. It causes up to 500,000 deaths a year worldwide; up to 5,000 of them in the UK. Outbreaks of seasonal flu tend to be contained in a particular area and to mostly affect people aged over 65.

But what really scares insurers is a flu pandemic, which has happened three times in the past century. This is a new flu virus for which people have no immunity and it can often be deadly. A flu pandemic can affect any age group, hit at any time of year and spread quickly across the globe.

More than 40 million people died in the 1918 Spanish flu pandemic. More recently, Hong Kong flu killed 1 million people in 1968 and 2 million people died in the Asian flu outbreak of 1957.

The World Health Organisation (WHO) warns that the spread of the H5N1 strain, better known as avian or bird flu, means we could be on the brink of another epidemic.

The virus usually affects birds but the first cases in humans were diagnosed in Hong Kong in 1997, when 18 people were infected and six of them died. Almost 250 people have died from the virus since, many of them children and young adults (map, right). The strain has a mortality rate of more than 60%.

The virus remains hard to catch from birds and is even more difficult to spread between humans. But the strain has the potential to become as contagious as normal influenza. “Once a fully contagious virus emerges, its global spread is considered inevitable,” warns the WHO.

Life and health insurance will obviously be affected by a pandemic. But any form of general insurance, particularly general liability, directors’ and officers’ and medical malpractice, as well as products with business interruption, could be triggered.

A report published last month by the emerging risks team at Lloyd’s says even motor insurance could be hit. Illness or the need to care for others would force many people to stay at home, keeping them off the roads, it claims.

According to the study, a repeat of 1918 would cause a global recession and reduce global GDP by up to 10%. Most industries would be affected. Insurers’ investment assets could be hit, depending on the mix they hold, and consumers would have less to spend on all types of insurance.

Advances in antibiotics, vaccines and antivirals, as well as improvements in how individuals and authorities respond to threats, mean we are now in a better position to handle a pandemic.

But because no one can predict for certain if or when the next one will strike, or how widespread it will be, insurers need to take precautions – especially in light of the current economic crisis.

Several insurers declined to comment on the issue, but Groupama says it has had an extensive risk management plan in place since early 2006.

“Clearly, the potential for increased losses would see results under real pressure but general insurers are well capitalised, regulated businesses,” says a spokesman.

“Their conservative investment policies should offer at least some protection from the worst in terms of volatility in the financial markets.”

Swiss Re believes reinsurers would survive too. “Large global reinsurers will typically have diversified portfolios, both geographically and by product lines, and are well positioned to address the possible losses from a pandemic,” says a spokesman.

Solvency II, the European directive on insurers’ capital adequacy due to come into force in 2012, could also help companies to prepare. The Swiss Re spokesman says: “With the move in many markets from a

rules-based solvency requirement to a principles-based approach – such as with Solvency II – regulators and life insurers are showing an increasing interest in the use of internal models.

“Swiss Re has developed a sophisticated epidemiological model to improve the level of understanding of the potential range of outcomes from a pandemic. We’ve been sharing this and discussing the results with regulators and clients in order to help steer the debate on the amount of capital to hold in the event of ‘mortality shock’ such as a pandemic.”

The WHO has identified six stages of a flu pandemic; avian flu is considered to be in phase three. This means there are human infections with a new subtype, but no or rare human-to-human spread.

Taking past pandemics into account, attack rates tend to reach about 25% to 35% of people.

The WHO says even assuming the new virus causes mild disease, up to 7.4 million people could die. It believes a pandemic would spread quickly in today’s world of frequent air travel and crowded infrastructure. It would hamper health services and vital services such as law enforcement and transportation would grind to a halt because of absent employees.

While the Lloyd’s report focuses on potential underwriting losses and challenging investment returns, Groupama says operational issues are a big concern too.

The spokesman says the biggest threat would be “maintaining service levels during severe staff shortages that could be worsened by any movement restrictions imposed by the government when a state of emergency is in force”.

He adds: “Where we have identified a potential exposure within our portfolio of business, we have considered the likely impact and considered appropriate actions that will help us manage any financial or service-related challenges that might be presented by a serious and widespread outbreak of infectious disease.”

While there are other concerns such as severe acute respiratory syndrome (Sars), the Hendra virus and growing resistance to antibiotics, a flu pandemic is by far the biggest threat to insurers. If they haven’t done so already, they should make sure they immunise themselves against it.