Reinsurers and direct writers could prepare, actuaries say
If the bird flu does become a pandemic in the United States, leading actuaries say that for reinsurers and insurers facing the issue may be akin to the way they had to face AIDS when it first hit in the early 1980s.
While there is general agreement that the current formulaic system for reserving would offer safeguards such as asset adequacy analysis, there is also optimism that a principle-based approach to reserving would pass muster should a pandemic materialize.
Currently, there is support among many insurers, actuaries and regulators to try to develop a principle-based reserving and capital system that would use capital efficiently and create flexibility but also protect contract holders and policyholders against insolvency in the event of negative experience from a cataclysmic event such as a pandemic.
Last month, the American Council of Life Insurers, Washington, said it would work to develop such a system.
There are some in the industry, however, who say the current formulaic approach to reserving would create more solvency safeguards for reinsurers and insurers.
If a pandemic hits, reinsurers could be impacted heavily because of the trend for direct writers to reinsure excess mortality risk, according to Donna Claire, president of Claire Thinking, Fort Salonga, N.Y.
The current system offers asset adequacy analysis as a way of measuring a pandemic’s impact on the financial health of a company, she explains.
A principle-based solution would reflect any volatility that resulted from an increase in mortality, Claire explains, so when a blip in company mortality appears, the company would start tracking it.
However, she adds, the formulaic approach builds in a degree of conservatism with a 10% load built into the basic formula of the CSO Tables.
Under the current formulaic system, reserves would not be set aside in anticipation of an event such as a pandemic, according to Larry Gorski, an actuary in the New Berlin, Ill., office of Claire Thinking. A small recognition of such a possibility could be included when establishing capital requirements, he adds.
A pandemic would be detected in asset adequacy reserving under the current formulaic approach and would be reflected as the event became a reality, Gorski says.