Fitch Finds Life Insurers/Reinsurers Most at Risk from Bird-Flu Pandemic

Fitch Ratings has issued a report, “Bird-Flu – Will It Ruffle The Industry’s Feathers?” which indicates that “life insurers and their reinsurers would be most likely to be the hardest hit by a bird flu pandemic.” However Fitch said it doesn’t anticipate “a threat of widespread downgrades to either the life, non-life or reinsurance sectors.”

Fitch notes that “life insurers, non-life insurers and reinsurers would all be affected by any falls in the investment market that could accompany a flu outbreak. Although this could be significant, if the outbreak is relatively short-lived, the overall impact is likely to be temporary. Consequently, Fitch does not envision a significant threat of widespread ratings downgrades to either the life or non-life sector at present.”

“Downgrades would be most likely if the virus mutates to allow human-to-human transmission and leads to a considerable increase in mortality claims or investment market losses,” stated Lauren Kalinowski, an Associate Director in Fitch’s U.S. Insurance Group in New York. “The companies most affected would be those with concentrations of mortality risk.”

Fitch said it based its conclusions on “various published expert opinions.” According to these estimates, “400,000 deaths could occur in Europe and 209,000 in the U.S in a bird flu pandemic. Under these assumptions, Fitch considers that the increase in claims could amount to as much as $18 billion in the United States and £20 billion [$35 billion] in Europe (8 percent of 2004 U.S. life insurance and reinsurance industry statutory surplus). It is difficult to assess how much of the risk could be passed onto reinsurers, but it is likely to be substantial. Fitch considers that the increase in claims in such a scenario would be tolerable for the life insurance industry. However, some players would likely be more affected than others.”

Fitch observed that non-life or P/C insurance policies “do not tend to offer cover for flu pandemics. If a pandemic were to occur it would probably result in an increase in employee absenteeism. However, business interruption due to absent workers is not likely to be covered by business interruption cover, as this type of policy relates more to physical damage or restricted access to buildings.”

The report also notes that “property and marine policies generally exclude damage due to the spread of infectious disease.” Fitch did indicate that “contingency cover, a specialized form of insurance, which tends to cover non-physical damage such as event cancellation, may well include cover relating to disease. However, as this type of insurance tends to be event-specific, the losses arising for insurers are likely to be modest.”

Most businesses seem to be more aware of the risks from such a pandemic, according to Fitch. As a result “insurers have been encouraged to review their business continuity plans (BCPs) to ensure they would be able to cope with a significant increase in staff absenteeism,” said the bulletin. “Business continuity planning is a factor in Fitch’s rating analysis and thus if BCPs were found to be inadequate this could be a further reason for downgrades, although this too is expected to be limited.”

Fitch will hold a teleconference on Wednesday, March 29 at 9:00 am ET to discuss the agency’s views, a separate statement will follow.

The special report ‘Bird-Flu – Will It Ruffle The Industry’s Feathers?’ is available on the agency’s Website at: www.fitchratings.com.