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The next pandemic: Are insurers prepared?

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Ebola. MERS. Avian influenza. Meningitis. These are the current disease outbreaks as reported by the Centers for Disease Control and Prevention (CDC). But what differentiates an outbreak from an epidemic from a pandemic is all in the semantics.

At this writing, there are no current pandemics, according to August Pabst, a spokesperson for USAID, a Washington, DC-based federal agency helping to stabilize countries by investing in agriculture, health systems and democratic institutions. USAID follows CDC and World Health Organization (WHO) guidance in declaring a pandemic. Influenza is the most common type of pandemic experienced in the United States, and the most recent strain of avian influenza, H7N9, is being watched by the CDC and WHO.

What hasn’t been called a pandemic — and may never be — is Ebola. That’s because according to nearly all definitions, Ebola is not close to meeting the criteria for a pandemic. As late as October 2014, AIR Worldwide stated the outbreak in west Africa is “unprecedented” in size, but that the probability of a global pandemic remains low.

Still, pandemics are top of mind for many insurers. A 2013 survey by Towers Watson revealed that global insurance industry executives ranked global pandemic as one of their top three most important long-term, extreme risks facing the industry. It’s a fear that had a few insurers reacting quickly, and perhaps somewhat rashly, when faced with the unfounded possibility that Ebola would be declared a pandemic.

Pandemic defined

But what is a pandemic? According to the WHO, a pandemic is “the worldwide spread of a new disease.” However, even WHO officials can’t agree on when to use the term. In responding to criticism that officials were too quick to label the 2009 H1N1 outbreak a pandemic, the WHO responded with a comprehensive explanation of what criteria was used to determine pandemic. It all came down to a few words.

The confusion came just a month before the pandemic was declared, when the WHO revised their description of pandemic to remove the words “enormous numbers of deaths and illnesses.” Instead, the revised description now reads “An influenza pandemic may occur when a new influenza virus appears against which the human population has no immunity.”

Not that the new definition clears anything up, since many organizations use different criteria to determine a pandemic. The CDC, sticking within the influenza virus realm, calls uses the term “pandemic” whenever “a novel influenza virus emerges that can infect and be efficiently transmitted among individuals because of a lack of pre-existing immunity in the population” while the Dictionary of Epidemiology defines pandemic as “an epidemic occurring worldwide or over a very wide area, crossing international boundaries, and usually affecting a large number of people.”

Historically, severe pandemics have been uncommon. The black death (believed to have been the bubonic plague) that claimed between 75 million and 200 million lives between the years 1346 and 1351, is still ranked as the worst pandemic in history. However, modern-day pandemics exist – as of 2011, HIV/AIDS is estimated to have infected 60 million people and AIDS has killed 25 million, according to the Robert Wood Johnson Foundation. Other pandemics include influenza, which is a commonly recurring type of pandemic. While the full impact of influenza is not known, the CDC estimates 39,000 deaths annually from the illness.

How insurers respond

When Ebola showed signs of spreading, a few insurers moved quickly to exclude coverage. Gigi Norris, managing director of Aon Risk Solutions’ western regional health care practice in San Francisco, calls the reaction reprehensible. ‘With respect to Ebola, this is the first time I’ve ever seen anything like this with everyone rushing to issue an exclusion,” she said.

Norris says the move is a reactive one, and based on what she calls a culture of fear. In her estimation, those fears are unfounded. With approximately 13,000 people around the world sick with Ebola, she believes the exclusions aren’t warranted.

That’s to be expected, says Huhnsik Chung, partner in the insurance and reinsurance department with Edwards Wildman Palmer in New York. “Every few years, we have an epidemic that’s localized and there’s a growing fear it may grow into a pandemic,” she said. “Insurers tend to narrow and exclude the scope of coverage, which leads to certain market opportunists providing that coverage.”

Still, Norris says some of the exclusions are based on sound reasons. “To be fair, most of the exclusions I’ve seen have been targeted at certain industries – energy, defense, and mining,” Chung explained. “They have exposures in those industries with people going to Africa to these potentially infected countries, and coming back.”

Still, some insurers, including Lexington Insurance, Gallagher and Hiscox, have launched various policies to act as either stand-alone products or wrap around existing coverage in an attempt to provide some risk transfer with Ebola.

In general, however, little coverage exists for pandemic situations. Richard Kosinski, president of Specialty Insurance Advisors in Boston, an exclusive U.S. distributor for Lloyds of London, says it’s because pandemics are typically short-lived and can’t be underwritten with any amount of certainty. He understands the reaction by insurers. “Some new pandemic throws everything into chaos,” said Kosinski. “They don’t understand how to underwrite it or price it, and how to implement it. That’s what you’re seeing [with Ebola]. The first reaction is to exclude it.” 

Sound reasoning

That, said Chung, is just good business strategy. He uses the example of influenza: “With influenza, there have been hundreds of millions of deaths within the last 100 years. Every 50 or 60 years, something bad comes along and a ton of people die. If you see the impact of that kind of real global pandemic on the global economies and the impact on insurance, the losses to insurers now if something like that were to happen, that’s going to create a hole into which will drain all of the reserves of the insurance companies. It would cost hundreds of billions of dollars,” Chung predicts.

Norris points out that even with coverage, some of the triggers are so specific that coverage may never apply. One policy states that coverage is triggered when ‘an order of an authorized governmental agency prohibits access to an insured location as a result of the enforcement of any law or ordinance regulating the actual — not suspected — presence of communicable disease.’ Norris says “A civil authority is not going to come and shut down a hospital because of a communicable disease. That’s why hospitals exist. On an environmental policy, do you have to wait to clean up the offending material until somebody shuts you down so your insurance policy will trigger?”

Creating an overall model may not be possible, in Chung’s estimation, due to the varying nature of each pandemic event. Blanket exclusions for something like influenza won’t work, he says, because insurers going to market with a product that won’t cover it will create market turmoil and allow competitors to capitalize on the need.

That’s exactly what has happened in the market concerning Ebola, say the experts. Since Ebola is not a long-term disease nor considered a pandemic, Kosinski says insurers offering the coverage may be able to do so cost-effectively. Current exclusions to coverage include coverage for people traveling to areas experiencing a high numbers of cases.

Best practices for pandemics

Instead, Norris says insurers should be looking at modeling diseases with pandemic potential to see how it might truly impact them “…to the extent there are possibilities for them to act as change agents – for example, working with insureds to make sure they have a policy where folks stay home if they are indeed ill – that’s a simple change.”

Kosinski advises insurers to examine infection rates, transmissibility and how many people are currently infected. His company offers Ebola coverage underwritten by Lloyds. The policy, originally a needle stick indemnity product coverage for hepatitis B and C and HIV, now includes Ebola exposure for an additional cost. He says that insurers considering coverage need to look at how big the pool of insureds is, what risk factors exist, and what the expected claims rate might be.

In the end, it’s a question of price. “If you look at the pool of insureds and it’s that small, you can construct anything to cover anything,” Kosinski said. “The question becomes, how can you cost justify it?”

Norris says a pandemic product is harder to underwrite because it affects everybody at the same time. “That’s conflagration risk, and it’s difficult to get your arms around,” she adds. “With pandemic, there’s pretty much nothing you can buy, that we’ve found, that is responsive.”

Of Ebola, Norris says “This is a perfect event, if you ask me. This shows that hey, maybe there’s just a lot of fear here and there’s not a lot of real exposure. This is something that’s underwritable.”

But she doesn’t see the insurance community ready to take the reins just yet. “In many ways, this is one of the last frontiers of insurance. It’s really something that folks haven’t cracked the code around. There are some different ways that it can be addressed. There are opportunities there for insurers if they’re willing to be creative.”