While populations are living longer than ever, life insurers still face the risk of a “mortality shock” from an influenza pandemic. But many companies lack the tools to determine the loss value and the amount of capital to hold for such an event.
With the trend in many of the world’s insurance markets toward principles-based approaches to solvency, internal capital models are assuming increasing importance. At the same time, there is a heightened general awareness of a pandemic threat, with various views being expressed on the possible impact.
Mortality shocks occur when death rates peak over a short period of time at levels significantly above the norm. The results from a sophisticated epidemiological model developed by Swiss Re improve the understanding of the potential range of outcomes from a pandemic, and can help insurers set mortality shock assumptions in their internal models.
Inside the model
The model simulates many thousands of hypothetical pandemics, with each simulation producing an estimate of how many extra deaths occur. It factors in the distinctive characteristics of the 3 pandemics of the 1900s, including the ability to cause death (lethality), the speed of spread, and differences in infection rates and lethality between age groups.
The model also allows for advances in pharmaceutical interventions, including antibiotics, vaccines and antivirals. Certain behavioral interventions–including the reduction in mixing between infected and uninfected people, and travel restrictions–are also accounted for.
The effect of each potential pandemic produced by the model on an insurer’s life portfolio can be estimated by applying weightings for exposures by age group and country.
Any pandemic simulated by the model produces a level of excess mortality that would occur in that hypothetical pandemic. From this, we can examine the probability that mortality over a one-year period will exceed a certain level. The results are weighted by age to better represent an insurance portfolio.
In most developed countries, a 1-in-200-year severity pandemic (0.5% annual probability) would give rise to excess mortality of between 1 and 1.5 deaths per 1,000 lives within a life insurance portfolio.
The accompanying graph shows some country-specific examples: about 1 per 1,000 (%) in the U.S., .7% in Canada, 1.0% in Switzerland and 1.1% in the United Kingdom for a 1-in-200-year severity pandemic.