An avian influenza pandemic would have a “material effect” on life insurers, but the chances of such an event happening are still “relatively low,” a rating service says.

If the flu ever migrated from birds to humans, there could be a significant number of insurer downgrades–many by several notches–particularly for those exposed to life and group life, says Moody’s Investors Services Inc. in its recent study “Bird Flu Risk for U.S. Life Insurers: A Tail Event.”

Scott Robinson, a vice president and senior credit officer of Moody’s and author of the report, emphasizes that “the risk of widespread influenza is currently incorporated into our ratings of companies.”

A severe epidemic “would have enormous repercussions through global financial systems,” he says.

For the life insurance industry, if such an event occurred, Robinson sees a likelihood of these events occurring:

o Investment losses, both on fixed income and equities, could be material. This would probably result from a decline in the equity markets, an increase in bond default rates and widening credit and bid-offer spreads at a time when companies would be required to liquidate investments to pay claims.

o The liquidity risk at primary companies could be exacerbated if reinsurers delay reimbursement to ceding companies.

o Death benefit claims on variable annuity guaranteed minimum death benefits would rise as equity markets decline and mortality rates increase. Additionally, fees on variable annuity accounts would decline with a decrease in account values.