Influenza Pandemics Aligning Solutions for Institutions and Individuals

1. Influenza PandemicsAligning Solutions for Institutions and Individuals Max J. Rudolph, FSA CFA MAAARudolph Financial Consulting, LLCIowa Actuarial ClubFebruary 23, 2007

2. Teachable Moment?

3. Topics • Overview/History of Pandemic Risk • Recent Developments • Risk to Insurers/Institutions • Discussion of SOA Pandemic Research Project

4. Overview/History • Recently 3-4 influenza pandemics per century • 20th century • 1968 Hong Kong flu (H3N2) • 50% of deaths above age 65 • Many of rest were young • 1957 Asian flu (H2N2) • 65% of deaths above age 65 • 1918 Spanish flu (H1N1) • 99% of deaths below age 65

5. Pandemics • Definition • New strain of virus with limited immunity • Ability to infect humans • Ability to transmit between humans (H2H) • Multiple waves common • Mutations attack different groups in each wave • High morbidity (25-30%), low mortality (<<1%) • Global is local, and local is global

6. Phases of Pandemic Alert • Inter-pandemic phase • 1 low risk of human cases • 2 new virus in animals, no human cases • Pandemic Alert Period • 3 very limited H2H • 4 new virus with H2H cases • 5 significant H2H transmission • Pandemic • 6 efficient/sustained H2H transmission

7. Why a severe scenario could happen • Supply chain constraints • Health care • Food/Energy/Services • Virus mutations build resistance to drugs • At risk population (HIV, cancer, diabetes) • Poverty and malnutrition • Reaction time • Travel • Vaccines take 6-9 months to develop

8. Why a severe scenario won’t happen • Better health care • Intensive care units • Germ theory • Antibiotics • Antivirals • Better coordination between human and animal disease researchers • Working toward a vaccine

9. Influenza Basics • 8 genes made of RNA • Can live for up to 2 days on hard surfaces (air?) • lungs are only human cells with the right enzyme • RNA mutates easily (DNA does not) • Proteins • Hemagglutinin (H) • helps flu to enter cell • Neuraminidase (N) • helps flu spread from cell • 2006 vaccine (set Feb 2006) H3N2, H1N1

10. 1918-20 Pandemic • Worst in recorded history • 50 to 100 million died worldwide • Mostly fall 1918 • 675,000 died in US • Virus mutated directly from birds • Other recent pandemics used reassortment (pigs) • Could it be repeated? • Developed world impacted less • Sanitation • Better able to deal with secondary infections • Smaller percentage aged 20-40

11. Background on 1918 • WWI • Poison gas • Crowded conditions • Bond drives • Politicians overrode health inspectors • recall China’s response to SARS • Fear/rumor

12. Abnormal Mortality Curve • W shaped curve experienced in 1918 • Peak for ages 20-40 • 50% of deaths • Immune system turns on self • Limited impact over 65

13. Mortality Curve: U or W Shape? Source: 1918 Influenza: the Mother of All Pandemics Jeffery K. Taubenberger* and David M. Morens†

14. Symptoms • Very sudden: 1-2 hours healthy to sick • Fevers: 101-105 degrees • Eyes burn • Severe aches in muscles, joints, backs, heads • As if they had “been beaten all over by a club” • Patient drowns – fluid in lungs (ARDS)

15. First Wave • Spring 1918 - normal flu • Very contagious – especially for young, healthy adults

16. Second Wave • Late summer/fall 1918 – deadly • Some protection if infected by first wave • Secondary infections • Pneumonia • Heart • Neurological

17. The Numbers • About 25% contracted flu and 20-100 million died worldwide • US: 25% morbidity, 2.5% mortality • .25 * .025 = .6% excess mortality • 675,000 died in US (population is 3 times larger today) • More US deaths than all 20th century combat deaths

18. Impact of Poverty • Combination of poverty/secondary infections drives greater impact in 3rd world countries • Large percentage of overall mortality • 1918 - India/Russia/Iran had 7-10% die • High risk today • HIV/TB/malaria • Areas of malnutrition • Africa

19. Current: Bird Flu (H5N1) • All influenza strains come from birds • Reassortment/Adaptive mutation • H5N1 is responsible for current bird pandemic • Watch for clusters as virus mutates • H2H strain likely less virulent

21. Current Statistics (WHO Feb 16) • 2003: 4 cases, 4 deaths • 2004: 46 cases, 32 deaths • 2005: 97 cases, 42 deaths • 2006: 116 cases, 80 deaths • 2007: 11 cases, 9 deaths • Total: 274 cases, 167 deaths • 61% mortality • qx rising since September 2006

22. Risk to Insurers • Insurance risk • Mortality and morbidity • Economic risk (liquidity) • Global recession likely • Counterparty risk • Reinsurer solvency • Business continuity • Claims and customer service

23. Pandemic ScenariosUS Dept HHS

24. What is the cost? • Life Insurers (per ACLI 2005 Fact Book) • Gross Net Amount at Risk • $16.5 trillion • Statutory Surplus • $250 billion • Excess deaths 0.6% • Cost: Flat Extra (before tax benefit and reinsurance) • $99 billion or 40% of surplus • Reinsurance ceded – face amount • $1.9 trillion • Other factors – health, payout annuities, GMDB

25. Insured vs. Population Mortality • Insured mortality about 60% of population • 60% have life insurance • Factors favoring insured mortality: • Socio-economic • Health insurance • Nonsmoking • Disease burden • BUT 1918 flu killed healthiest

26. Flu Season of 1999-2000 • Annual flu arrived early • System caught unprepared, no capacity • Equipment shortfalls • Nurse shortage

27. Economic Risk • Global recession: estimated GDP drop of 3% • Asset default rate will spike • Interest rates will reduce (offset) • Who will buy your assets? • Liquidity event?

28. Counterparty Risk • Reinsurers have low Reserves set aside relative to Face Amount • Other catastrophes will not go away • 12 to 18 month event • Might not be able to pay promptly, if at all • Will direct writers survive if reinsurers fail?

29. Business Continuity Risk • Advance planning and communication is critical • Minimal notice once clusters form • High absenteeism due to sick, caring for family • Assume 40-50% • Succession planning • Multiple locations (field offices/international)

30. SOA Study • Actuaries consider mortality risk our specialty • Insurance Information Institute (Weisbart) estimates of mortality claims surge risk • Moderate scenario: $31 B • Severe scenario: $133 B • SOA research project to be released in the next month

31. Issues • Just-in-time supply chain • Hospitals: oxygen, gloves, ventilators • Individuals: medicine, parts, food, energy, garbage • Will FedEx, UPS and US Post Office deliver • Pockets of social unrest? • Back up plans rely on internet • Allocation • Vaccines • Hospital beds • Emergency personnel • Economic: no built in recovery

32. Advice • What should you do? • React proactively • Set up internal influenza team • HR practices (send sick home, pay practices) • Reinsurer risk • Telecommuting/multiple shifts • Privacy issues • Stockpile supplies • Advice for employees • Use available resources from county, CDC, WHO

33. Bibliography • America’s Forgotten Pandemic • Alfred W. Crosby • Flu: The Story of the Great Influenza Pandemic • Gina Kolata • The Great Influenza: The Epic Story of the Greatest Pandemic in History • John M. Barry • The Monster at Our Door: The Global Threat of Avian Flu • Mike Davis

34. “With the recent development of hygiene and sanitation as marked as it is, the world felt safe against the possibilities of any new conflagration from influenza. But the experience of the last two years has demonstrated that we are not so far advanced in our knowledge of this disease, of its cause and of the methods of its control as we thought we were.” James D. Craig and Louis I. Dublin Actuarial Society of America Transactions (Vol. XX, Part 1 No. 61)

35. Thank you! Max.Rudolph@rudolphfinancialconsulting.com (402) 895-0829 www.rudolphfinancialconsulting.com