Saturday, October 18, 2008

The Lloyds Report: A Closer Look



# 2396




Yesterday Lloyd's Insurance issued a pandemic impact report for the Insurance industry, which can be downloaded here.






The executive summary (listed below) gives a pretty good overview of the risks, as seen by the Insurance industry, of a pandemic.   There are 5 points to this summary.  After which I'll provide a little commentary.





1. A PANDEMIC IS INEVITABLE     With historic recurrence rates of 30-50 years it is prudent to assume that a pandemic will occur at some point in the future. The severity of such events is highly variable; some estimates suggest the most severe to date, in 1918, killed up to 100m. Many pandemics affect the old and young; but some (including the 1918 event) can, perversely, affect the most healthy.


2. 1918 MAY NOT BE THE WORST CASE  It is certainly true that the 1918 event was extreme relative to other pandemics in history. However many published “worst case” scenarios take 1918 as a base. There is a danger that we over optimise to this one scenario. There are other forms of pandemic than influenza, some have higher case mortality. Pandemic preparedness should consider a range of scenarios to ensure plans are appropriately flexible.


3. ECONOMIC IMPACTS MAY BE SIGNIFICANT  A repeat of the 1918 event is expected to cause a global recession with estimated impacts ranging from 1% to 10% of global GDP. Most industries will be affected, some more than others. In particular, industries with significant face to face contact will be impacted significantly. Insurers investment assets may be affected depending on the mix held. Wider economic and social effects may lead to secondary forms of loss for insurers.


4. MANY INSURANCE LOSSES ARE POSSIBLE  For some classes of business such as, life and health it is clear that the impact will  be adverse. For other classes of business it is less clear but many forms of liability covers including general liability, D&O, Medical Malpractice as well as specific products offering business interruption and event cancellation could be triggered. Inner limits for Pandemic losses (vertical and sideways) may help to contain exposure.


5. SECONDARY IMPACTS MAY OCCUR   Events causing significant global and societal turmoil can give rise to considerable secondary impacts. It is far from clear which of these, if any, would occur; but for resilience planning purposes it is worth considering them. For example the lawlessness experienced in New Orleans after Katrina could
be repeated if police services are affected. Traditional claims such as fire loss may be exacerbated if fire emergency services have depleted efficiency and if tradesmen are in short supply.




When it comes to risk assessment, Lloyds is about as authoritative as they come.   In five paragraphs they have essentially echoed the same message that experts like Dr. Michael Osterholm of CIDRAP and HHS Secretary Michael Leavitt have been giving for years.



A pandemic is inevitable.  And it could be very bad.



We'll take these points one at a time, and try to add a little value.




Interestingly, the Lloyds report takes pains to point out that while we worry about an influenza pandemic the most, there are other candidates out there that could spark a pandemic (or at least an epidemic).  


They list:


  • Hendra Virus
  • Nipah Virus
  • Cholera
  • Small Pox
  • Bubonic Plague
  • Tuberculosis
  • Lassa fever
  • Rift Valley fever
  • Marburg virus
  • Ebola virus
  • Bolivian hemorrhagic fever
  • MRSA
  • SARS



I could add Dengue, Chikungunya, and of course Virus X, the one we don't know about yet, to this list.   


Influenza, however, is (for now) the most easily spread of these diseases, and remains our main focus.   Should a mutation occur, one that allows Ebola, or Marburg, or Lassa fever to spread more easily, it would change the playing field considerably.  


I addressed many of these other emerging pathogens in my blog  It Isn't Just Bird Flu.


The take home message is, ready or not,  another pandemic will occur. 






Most `official planning' uses the Spanish Flu of 1918 as the presumed `worst-case scenario'.  


For health officials, who must often `sell' the idea of preparing to their government, or their community, 1918 is something they can point to as both relatively recent and reasonably well documented.


But privately, many health officials admit that 1918 isn't the worst-case scenario.  If you need `official evidence' of this, simply look at the HHS's Pandemic Severity Index.



Figure A. Pandemic Severity Index



Category 5, starts at a 2% Case Fatality Ratio (CFR) and goes up - with no ceiling indicated.  Just an arrow. 


In the United States, the 1918 pandemic was a low Category 5 pandemic. Roughly a 2% CFR.    In other parts of the world, the CFR was much higher.  Some estimates put the CFR in India at over 15%.


There are reasons to believe that the H1N1 virus, the cause of the Spanish Flu, might have circulated in the mid-to-late 1800's.   And that at least some - mostly elderly - people had some immunity. 


If true, this could have moderated the effects of the 1918 pandemic. 


The H5N1 virus currently kills more than 50% of its known victims.  Whether this virus will ever become a pandemic, or what its CFR will be if it does, is unknown.   


But even a moderately severe pandemic, something even less than we saw in 1918, has the capability of killing tens of millions of people and disrupting economies, and societies, worldwide.





Yesterday the World Bank issued a revised estimate of the impact of a `severe' pandemic.  They estimate that such an event could cost the world 4.8% in gross domestic product, resulting in a loss of $3 Trillion dollars.


Lloyds puts the loss at anywhere from 1% to 10% of gross GDP, assuming a 1918 scenario - but also reminds us that 1918 is not the worst possible case.


Either scenario would indicate a severe, and possibly prolonged, global recession. 


As the World Bank report points out :


Given the tremendous uncertainties surrounding the possibility and eventual nature of a pandemic inflation, these simulations must be viewed as purely illustrative. They provide a sense of the overall magnitude of potential costs. Actual costs, both in terms of human lives and economic losses, are likely to be very different.


An understandable caveat, given the number of variables involved.


For the average individual, the most important economic indicator is whether they have a job, and are able to pay their bills.   


Absenteeism is forecast to run as high as 40% during the height of a pandemic.   This number, like so many others, is a pure `guesstimate'.   Much will depend on the severity of any pandemic. 


Many businesses may find they are unable to remain open during a pandemic wave (which could last weeks or even months).   


Their business model may depend on large gatherings of people (theatres, sports arenas, restaurants) that could be outlawed during a pandemic, or they may be dependent upon a supply chain for goods and services that may not be available.


Even if their employees were willing to work, they may not be able to.  The HHS gives this sobering advice on their pandemic planning page:


Being Able to Work May Be Difficult or Impossible

  • Find out if you can work from home.
  • Ask your employer about how business will continue during a pandemic. (A Business Pandemic Influenza Planning Checklist is available at
  • Plan for the possible reduction or loss of income if you are unable to work or your place of employment is closed.
  • Check with your employer or union about leave policies.






Since this report was generated for the Insurance Industry, it is understandable why this would be a major point in their summary.  But even for those of us not in the Insurance Industry, this has a major impact.


The ability of many businesses to recover, and resume operations, after a pandemic will depend in part on the insurance industry.  Not all pandemic losses will be covered by insurance, of course.  But some will be.


It doesn't take Clarence Darrow to figure out that there will be a mountain of post-pandemic litigation as well.   A business that today ignores the recommendations of OSHA or the HHS to prepare their workplace for a pandemic could well find themselves facing a jury after a pandemic.


To mitigate losses during a pandemic, it is only prudent to prepare today.





An understatement, if ever there was one.


But much like trying to estimate the economic impact of a pandemic, calculating the secondary impacts is pretty much a foray into speculation.  The range of reactions by communities during a pandemic are likely to to run the gamut from A to Z. 


Some will come together, others will fall apart.


It is my contention that the better prepared communities are the more likely they are to endure and prevail during a pandemic crisis.  


While local governments can do much to help during a crisis, core preparations must be made in advance by individuals, businesses, and local organizations.



A recent report from  the Johns Hopkins Berman Institute of Bioethics entitled Ethics and Severe Pandemic Influenza: Maintaining Essential Functions through a Fair and Considered Response, included the following snippet:


. . .  individuals and families who can afford it should do their best to prepare for any disaster. The paper notes, the more initiative the general public exercises in stockpiling several weeks' worth of food, water, paper goods, batteries medicines, and other needed supplies, the less vulnerable they will be to a break in the supply chain.


It is important for leaders to communicate to the middle class and the wealthy that it is their responsibility to prepare for self-sufficiency in order to free up scarce supplies and allow first responders to direct their attention towards those too poor or vulnerable to prepare themselves.




A clarion call to prepare, if ever there was one.   




To that end, the HHS's site is the best one-stop shopping place for flu information on the web.  For preparedness information,I know of no better place to start than GetPandemicReady.Org.   Their website is filled with essential, but easy to follow, preparedness advice.


The document, Community Strategy for Pandemic Influenza Mitigation

(PDF - 10.3 MB), outlines in great detail the steps that will be required to reduce the spread of a pandemic virus in our communities.   It is required reading for anyone interested in mitigating a pandemic.





Other places with excellent information include:










We can't stop the next pandemic from happening.   But we can prepare, and in so doing, help mitigate its impact.


All we need is the will to do so.


graeme said...

Michael, an interesting read and on the surface Lloyds have made a reasonable summary of the issues facing their industry. However, I think we only need look at the current financial crisis to see clearly that there is going to be a huge gap between reality in a severe pandemic situation and the advance planning. Just as the financial institutions used such extreme leverage that in a serious crisis, they didnt have the necessary capital resources to meet all the cascading claims made on them, so I think will be the case with the insurance industry. In a total catastrophic situation, claims will go unpaid and most , if not all of the insurance indutsry will likely file for bankruptcy. It is doubtful if there will be a surviving taxbase for even Governments to bail out policy-holders.
The estimate of a 1-10% drop in world GDP could well prove too conservative, and my assumption is that we would face a complete meltdown of the global finacial and economic system. Pension, social security , welfare, insurance and even medical obligations will probably get substatially erased.
Surviving a severe pandemic will not just be a matter of physical survival, but critically also of economic survival. I think the most realistic working assumption a suviving individual should make is that they will have to start again economically with whatever skills they have and can get remunerated for in the post-pandemic economy.
I think the present financial crisis is providing us with much we can learn from.......albeit, not significantly prepare for

FLA_MEDIC said...


I have no doubt that in a truly severe pandemic, a good many institutions will fail. And the cascade effect could be enormous.

This is why I push personal preparedness so hard.

Those people that rely on government agencies for help during a pandemic crisis risk great disappointment.

Assuming we see a severe pandemic, I would worry as much (or more) about the economic and societal impacts as I would the virus itself.

There is a grim joke, told by infectious disease specialists that goes:

The 19th century was followed by the 20th century, which was followed by the 19th century.

One has to hope that this joke doesn't become prophetic.