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TRUPHENA KHALAYI (078064)& BANSRI PATEL MUKESHKUMAR (078873)LIFE CONTINGENCIES I

BBS-ACTUARIAL SCIENCE (THIRD YEAR)9TH MAY 2015

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ContentsINTRODUCTION ........................................................................................................................................ 3

PANDEMIC EVENTS IN HISTORY EARLY HISTORY (before the 20th century)..............................3

BRIEF DESCRIPTION ON A FEW CASES FROM THE 20TH CENTURY........................................4

RECENT AFRICAN PANDEMICS ........................................................................................................5

CONSEQUENCES OF PANDEMIC RISK ................................................................................................. 6

SPECIFIC IMPACTS ON LIFE INSURANCE .......................................................................................6

RECOMMENDATIONS.............................................................................................................................. 7

MEASURING PANDEMIC RISKS.........................................................................................................8

MODELLING PANDEMIC RISKS.........................................................................................................8

HEDGING STRATEGIES .......................................................................................................................9

USING THE PANDEMIC RISK MAP ..................................................................................................10

EFFECTS OF THE HIV/AIDS PANDEMIC ON THE KENYAN LIFE INSURANCE INDUSTRY..... 10

CONCLUSION........................................................................................................................................... 11

REFERENCES ........................................................................................................................................... 11

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INTRODUCTION

Pandemic risk arises when a disease that affects at least 25% of the globe causing high morbidity,

excessive mortality rates and social and economic disruption. (According to AON)

According to the WHO a pandemic can start when the following conditions are met:

• The emergence of a disease new to the population

• The agent infects humans, causing serious illness

• The agent spreads easily and sustainably among humans

They are low frequency events with potentially high impact for which there is no historical record.

PANDEMIC EVENTS IN HISTORY EARLY HISTORY (before the 20th century)

Peloponnesian Pandemic(430-426BC)

Typhoid fever killed a quarter of the Athenian troops during the Peloponnesian war, a quarter of the

population and fatally weakened the capital of modern-day Greece, Athens. The havoc caused by the

disease had a smaller scope due to the sheer virulence that hastily consumed the victims before they could

further spread it.

Antonine plague(165AD-180AD)

This was believed to be Small pox transported to the Roman mainland by the traders from the Far East. It

devastated the ancient civilization and killed approximately five million people. Some seven decades later

5000 people were reported to have succumbed to a consequent outbreak of the same.

Plague of Justinian(541AD)

This is the first recorded outbreak of the bubonic plague from the rat carriers. It started in Egypt and

reached Constantinople the following spring, ravaging through the city and killing (according to the

Byzantine chronicler Procopius) 10 000 people a day at its height, perhaps as much as 40 percent of the

city's inhabitants. It went on to deplete a quarter of the human population of the eastern Mediterranean.

Cholera(1816AD-1834AD

Hitting India and China first then in a second pandemic reaching London, Ontario and New York in 1829.

It had reached the Pacific Coast of North America by 1834. Five more cholera pandemics would reach out

to all corners of the earth over the next 100years or so, from Russia to Africa, to Indonesia, Europe and

the United States (again) and visiting Russia twice more. The Pandemic also visited India again and

infected Bangladesh in 1963.

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Asiatic flu (1889 AD-1890AD)

This was first reported in May 1889 in Bukhara, Russia. It rapidly spread west and hit North America in

December 1889, South America, India and Australia in the following year. It was purportedly caused by

the H2N8 type of influenza virus and had a very high attack and mortality rate

Typhus fever

Emerging during the Crusades, it had its first impact in Europe in 1489AD in Spain. During fighting

between the Christian Spaniards and the Muslims, the Spanish lost 3 000 to war casualties and 20 000 to

Typhus fever. It is believed that during times of war it is generally accepted that during times of war,

more deaths will result from disease and epidemics than as a result of warfare, sometime as much as 10

times more due to the unhygienic conditions. In 1528AD the French lost 18 000 troops in Italy to typhus.

In 1542, 30 000 people died of typhus while fighting the Ottomans in the Balkans, in 1812 it played a

major role in the destruction of Napoleon's Grande Armée and also killed numerous prisoners in the Nazi

concentration camps during World War II. This bacterium has had one of the most recurrences of its

pandemic historically and also has waves when its peak occurs more than once. It was commonly

referred to as gaol fever or camp fever.

EXAMPLES OF HISTORICAL PANDEMICS (FROM 20TH CENTURY ONWARDS)

1. Spanish Flu, 1918

2. Poliomyelitis, 1900s-1950s

3. Asian flu, 1957

4. Hong Kong flu, 1968

5. Ebola outbreak, (February 2014)-West Africa

6. H7N9 bird flu (2013)

7. Swine flu (2009)

8. H5N1 avian flu

9. HIV/AIDS (1980s-2001)

BRIEF DESCRIPTION ON A FEW CASES FROM THE 20TH CENTURY

SPANISH FLU, 1918

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The Spanish flu occurred in the 1918, it was an influenza that spread rapidly and widely in a short span

of time. It was the most deadly influenza pandemic in recorded history (400 years), the worst pandemic in

the 20th century. Normally for flu 90% of the deaths are people older than 65 but during the Spanish flu

99% of the deaths caused were under the age of 65. More of the working age was affected, it could be

since influenza is a very contagious disease that can spread when one coughs or sneezes and working age

have more social interactions than the old age. The death toll was 5-10 million people though it is unclear

of the exact deaths caused due to incomplete statistics.

ASIAN FLU, 1957

Asian flu occurred in the 1957 and was the second worst pandemic that occurred in the 20th century. It is

similar to Spanish flu because it mimicked a normal seasonal flu’s symptoms but with a much higher

infection rate and a contagious disease affecting the respiratory system. It was first discovered on

February 1957, the vaccine production began during late May and in limited supply available by august

1957. It first hit the Far East and then spread to USA during summer 1957. It mostly affected children,

young adults and pregnant women. The death toll was 1-2 million worldwide with about 70,000 deaths on

the USA.

HONG KONG FLU, 1968

The Hong Kong flu was similar to the Asian flu but it caused fewer deaths of about 1 million. It mostly

affected those over the age of 65 that is the elderly. The same virus returned in the 1971-1972. It also

originated from Asia.

RECENT AFRICAN PANDEMICS

Ebola Haemorrhagic Fever

This pandemic is not anything new because the virus that spreads the disease was discovered in 1976 to

occur naturally in the Ebola River in the Democratic Republic of Congo. It is transmitted through contact

broken skin or mucous membranes from the infected person’s orifices.

In 1976 there were 2 consequent waves to hit Sierra Leone, Liberia and the D.R.C. Lately since February

2014 there was a recent outbreak of the disease mostly affecting West Africa and notably Sierra Leone

with a death toll of 11,009 within the few short months although May 9th 2015 was the official 42nd day

with no new cases having been reported.

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HIV/AIDS

This is transmitted in a variety of ways but basically through intravenous or sub-cutaneous contact with

the body fluids or fluid membranes of the infected persons. The virus attacks the CD4 T-cells and

destroys their genetic material for the proliferation of the virus. Thus the body is left weak to attack from

the opportunistic diseases such as Kaposi Sarcoma and Tuberculosis.

This pandemic devastated many African States during the 1980s to the early 2000s due to the lack of

access to the Anti-retroviral drugs but all that has changed now.

CONSEQUENCES OF PANDEMIC RISK

• Mortality rates tend to be high- increased number of deaths in a very short period and pandemics

weren’t factored in calculating mortality rates hence it affected the insurance company.

• In some of the pandemic cases the working class was affected more than the older members of

the society, most of the working class people had just taken a life insurance and not paid many premiums

e.g. Spanish flu. This would have an adverse effect on the insurance companies when they have to cater

for the claims.

• There could be positive impact in terms of an increase in demand for insurance products mostly

basic like health insurance as people would see the need of having costs catered for during an uncertain

event.

• Pandemic risks tend to have economic impacts in terms of a fall in GDP as the output of the

country falls drastically especially when the working age is affected this would further affect the exports

of the country as there will be less transportation and social interactions with other countries. Pandemic

events also increase government spending that is medicine costs and vaccine costs. Furthermore, it leads

to a fall in interest rates and a fall in exchange rates of the country.

• Infections mostly lead to secondary infections where an event now will have effects in the future

which are quite uncertain and unpredictable at times leading to more pandemic risks.

SPECIFIC IMPACTS ON LIFE INSURANCE• Endowment policies, whole life insurance policies and term insurance policies which pay the

lump sum to the beneficiaries are likely to suffer losses due to very many claims in a very short span of

time, especially when the pandemic risk is uncertain.

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• Pure endowment insurers might benefit because people would die within the policy term and they

only pay the lump sum if the insured lives beyond a certain age.

• Pension- Old age pension is paid if the insured is alive at the pre-agreed age, so if the insured’s

die during such an event they are likely to benefit however, in the survivors’ pension benefits are paid as a

pension to widow and orphans if the insured dies. Increasing mortality will cause losses to insurance

companies underwriting survivors’’ benefits.

• Life reinsurers tend to be highly affected especially pure life reinsurers who mostly concentrate

on pure mortality risk. They face increased number of claims from several direct insurers in a short time.

Reinsurers exposed to medical expense businesses are also likely to be highly affected depending on the

agreements made at the start of the contract.

• Reinsurers with a high proportion of older reinsured risks will be in a better position than those

with younger risks especially when the pandemic affects the younger persons more than the older.

• Depletion of reserves set aside suddenly which might lead to losses in future if the reserves

cannot be restored before another uncertain event.

RECOMMENDATIONS

• Use of the epidemiologists’ statistics to try and generate a ‘what if’ analysis for probability of

occurrence and frequency of waves if it occurs. This would give the insurance companies to prepare for

the uncertainty by diversifying the risks and hedging.

• Find worst case scenario for insurer and set up enough reserves in order to face fewer losses the

next time.

• Structuring the policies of the younger and older persons in a manner that they offset each other if

and when the pandemic occurs. E.g. when the Spanish flu occurred it mainly affected the working age and

not the older persons hence if there were different products the losses would be less.

• Diversification of life insurance products and the dates instead having products for pure mortality

or young risks only. Having different products for different age groups would diversify the risks and

hence balance the losses to the gains.

• Raising the required solvency ratio for mortality insurers and health insurers in case of

pandemics. E.U proposed a ratio of 0.3 but it is still in the works. The solvency ratio indicates whether a

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company’s cash flows are sufficient to cater for long and short term liabilities. Increasing the ratio will

lead to more cash set aside to cater for the uncertainty and hence less losses.

MEASURING PANDEMIC RISKS

Measuring pandemic risks has very high uncertainty because the following factors tend to be unknown:

• Nature of disease/pathogen

• Pandemic preparedness and efficiency of medical response

• Behavioral factors

• Time, Severity, spread of the disease.

MODELLING PANDEMIC RISKSDecisions to be made:

1. Stochastic models or deterministic models?

Deterministic models- these are models where fixed variables are input in order to give fixed output.

Deterministic models can be used to model pandemics where data from the past events can be input and

decisions can be made based on the output, though there is uncertainty if the same event would occur

again and it might not help.

Stochastic models- these are models where one or more of the variables are random and therefore the

outputs are also likely to be random, showing output of different scenarios. Stochastic models tend to be

suitable to model pandemics but they are very expensive.

2. What mortality tables to use?

It is difficult to decide what mortality tables to use, the ones for the insured or the ones for the whole

population. Insured mortality tables represent the mortality rates for the people who have been insured

which are different from the tables of the population. Hence, insurance companies will find it difficult to

make decisions when the results tend to be different for both the mortalities.

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SOA has a model called “Re-Metrica dynamic financial analysis tool” that is said to be helpful when

measuring pandemic risks.

HEDGING STRATEGIESThese are simply strategies for damage control for an insurance firm in case the pandemic risk occurs and

they’re caught unawares having not accounted for the possibility in their mathematics.

DIRECT

Pandemic catastrophic coverage

This reinsurance policy is modeled after catastrophe reinsurance and may be included as a loss cause. The

policy indemnifies losses for a specific loss cause after retention and up to a defined limit. Definitions

attempt to cover losses from a several month long period with a reinstatement.

Stop loss cover

This reinsurance policy pays indemnity benefits in excess of attachment point up to specified limit to the

ceding company. Treaty responds to any loss cause

Pandemic industry loss warranty

This reinsurance policy is popular for hurricane reinsurance; this protection has a non-client specific

parametric trigger with indexed benefits. Upon a defined event, the cover is activated and may pay up to

the limit purchased in a proportion of losses relative to industry losses.

Extreme mortality bonds

These bonds pay investors more in case of a pandemic, terrorist attack, war or a recession in the economy.

INDIRECT

Business mix mitigation

Taking the long position on the longevity risk by assuming payout annuity structured settlement or senior

life settlement risk through direct acquisition or via a swap structure.

Contingent capital

This is through the use of debt that converts to equity when there is a crisis or trigger event and thus pays

an even higher return because there is more risk during these events and equity has a higher return

generally because it is riskier than debt.

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USING THE PANDEMIC RISK MAPThis is a map that has indexed each country with regards to:

how possible is it for a pandemic to start there

how possible is it to reach them from nearby or far away

the possible worst case scenario

the frequency of outbreak and number of waves

expected duration of attack

Geographical coverage of possible spread

This table can be used to transform your current mortality tables and thus update them to factor in

pandemic risk.

EFFECTS OF THE HIV/AIDS PANDEMIC ON THE KENYAN LIFE INSURANCE INDUSTRY

The pandemic has changed the limiting age (ω) when calculating tpx to 62 years. This has led to a

reduction in the annuities purchased (1% of the products sold) due to the low life expectancy.

Increment of adverse selection, because

HIV and AIDS Prevention and Control Act, 2006 –

•no person shall be compelled to undergo a HIV test or to disclose his HIV status for the purpose only of

gaining access to life insurance.

•AND the organization should devise a reasonable limit of cover for which a proposer shan’t need to

disclose HIV/AIDS status

Therefore making it harder to know who is riskier health-wise as well as increasing the underwriting costs

significantly.

An estimated 49,126 people died of AIDS-related causes in 2011, approximately 35% of the figure in

2002–2004. For that reason we no longer use the UK 1949-1952 tables we now use the KE-2003-05

tables.

The solvency ratio in the country for life assurers has changed (increased as a requirement by law) in

order for the prudent reservation in life assurance companies.

This HIV/AIDS pandemic has increased the underwriting costs for both new businesses and for claims

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There have been suggestions that unit-linked policies are better choice for the insurer and insured in the

market with the HIV risk

A suggested method of increasing the average mortality rates is that the high withdrawals would be

compounded by a HIV risk coefficient

CONCLUSION

All in all in regards to Pandemic risk more often than not the odds are stacked up against the insurers on

when they occur and how much loss they cause but in modern times the W.H.O have put in place tactics

to combat outbreaks and sniff them out before they hit and there is a great deal of medical advancement

that has delightedly exterminated many terminal illnesses of the past such as small pox and consumption

(Tuberculosis).

Lastly with all the recommendation there is still assistance from the international bodies and the

respective governments of each country whether in terms of reserving or statistics calculation.“The good

news is that, even if the insurance market seems largely ill-prepared, the national preparedness plans can

help in model calibration” (the actuary magazine)

REFERENCES Effects on the Life Business in Kenya - by Luke Wanjohi (2014)

NAIC CIPR Spring Event on Pandemics-Phoenix, Arizona, March 27, 2015, David Rains.

Pandemic modeling by FTI Consulting,March 27, 2015.

Assessing the Impact of a Pandemic on the Life Insurance Industry in South Africa by André

Dreyer, BSc (RAU), BSc (Hons) (Wits), FIA, FASSA Grete Kritzinger, BComm (Actuarial

Science) (Stellenbosch),Jethro De Decker, BBusSc (Hons) (Actuarial Science) (UCT)-2007

The Actuary Magazine (pg. 22-24)-November 2013 issue