SARS Underscores The Limits Of Insurance Underwriting

Severe acute respiratory syndrome (SARS), a previously unknown disease, presented a unique challenge to the world in general and the insurance industry in particular in the spring of 2003. It struck fear in the hearts of millions, crippled international travel for a time, and significantly disrupted the economies and daily activities in the areas affected.

While the economic impact to insurers was limited, SARS is likely not over and its ultimate effect is still uncertain.

The disease also served notice that the insurance industry has vulnerabilities that are difficult to manage: the inherent uncertainty of estimating mortality and morbidity, the limitations of underwriting, and the dangers associated with the concentration of risk.

In many ways, SARS offers a perspective on a previous era for individuals and insurers alike, one in which unpredictable infectious diseases were common and life was more uncertain.

Caused by a new strain of coronavirus, SARS represents the first major new infectious disease of the 21st century. The disease initially was reported in the Guangdong province of China in November 2002.

Swift international travel and ease of transmission combined to make its spread throughout the world a reality.

Fortunately, localized outbreaks have been limited by aggressive case identification, rapid isolation of symptomatic individuals, tracking of case contacts and quarantine of those persons exposed to infected patients.

Several factors make SARS problematic for insurance underwriting. The incubation period is short and the symptoms are nonspecific; many patients present with fever alone.

Nevertheless, there is a significant risk of respiratory failure resulting in a prolonged costly hospitalization or death (the case fatality ratio was 9.6%). Also, scarring of the lungs has taken place among individuals who recover. At this time, it is not certain if this damage is permanent.

For a disease that received so much press, only 774 deaths occurred worldwide as of July 2003. The mortality risk varies with certain factors. Age is very important; mortality risk is over 50% in those over age 65.

Other risk factors include: the presence of diabetes, heart disease, cancer and infection with hepatitis B. (However, a number of otherwise healthy individuals also died due to SARS.) No deaths have taken place thus far in the United States and Europe.

Interestingly, this mortality pattern points out to the insurance industry its vulnerability due to financial concentration of risk.

As well, increasing numbers of large policies are being issued to older individuals, precisely the group at highest risk from the disease. Thus, a significant outbreak of SARS in the U.S. has the distinct possibility of producing a large dollar amount of life and health claims, even if the number of actual events is modest.

Thanks to successful infection control procedures, SARS appears to have abated in most parts of the world. Yet few expect the disease has been eradicated, and many experts foresee a recurrence of the illness with the onset of colder weather, the normal cycle for coronaviruses.

While eventual migration of SARS to the U.S. and Europe seems inevitable, barring a major mutation in the virus, a catastrophic epidemic reminiscent of the 1918 influenza pandemic seems unlikely.

Implications for insurance will depend on the evolution of the illness over time. The probability of a large number of death or health claims related to SARS appears remote, even though the disease causes prolonged hospitalizations and has a high case fatality rate in certain subgroups, especially the elderly.

Unfortunately, insurers ability to manage the risk posed by SARS is limited. Travelers and those residing in areas with local transmission can be evaluated more carefully.

Even so, people may be healthy today and sick tomorrow, and there are no good markers for who will become ill or how severely they will be affected.

Pulling out of markets or limiting face amounts could reduce new exposures but would severely affect producers and not address the issue of policies in force. In short, the protection offered by traditional risk selection and mortality management techniques is minimal.

To a large extent, insurers are along for the ride with SARS and must hope that the long-term adverse results of disease remain limited. The worst-case scenario is that a more significant economic result for insurers could affect profitability and force the industry to turn to pricing and capacity issues to limit risk.

Cliff Titcomb, MD, is vice president and chief medical director for ING Res Individual Life and Health Operation based in Denver. His e-mail address is cliff.titcomb@ING-Re.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, October 31, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.