2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Pandemic Scenario By Richard Houde September 25, 2008

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Pandemic Scenario Research Paper The objective:Provide information to members about: Existing pandemic research and models Factors/parameters to consider in the development of pandemic scenarios The objective:Provide information to members about: Existing pandemic research and models Factors/parameters to consider in the development of pandemic scenarios

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Why a Pandemic Scenario? Pandemics are still unpredictable events (occurring at 10 to 50 years intervals) Pandemics are plausible events that can threaten the financial conditions of insurance companies Pandemics will impact many risk categories considered in DCAT and form interesting examples of integrated scenarios Pandemics are still unpredictable events (occurring at 10 to 50 years intervals) Pandemics are plausible events that can threaten the financial conditions of insurance companies Pandemics will impact many risk categories considered in DCAT and form interesting examples of integrated scenarios

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Pandemic Scenario Presentation What we know about pandemics General considerations in development of pandemic scenario Considerations specific to DCAT risk categories What we know about pandemics General considerations in development of pandemic scenario Considerations specific to DCAT risk categories

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 What is a Pandemic Global outbreak of a disease caused by an agent (virus or bacteria) new to the population (or long absent from the population) The agent infects humans causing serious illness The agent spreads easily and sustainably from person to person Global outbreak of a disease caused by an agent (virus or bacteria) new to the population (or long absent from the population) The agent infects humans causing serious illness The agent spreads easily and sustainably from person to person

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 WHO’s Epidemic and Pandemic Alert and Response (EPR) Diseases covered by EPR AnthraxMarburg HF Avian influenzaMeningococcal disease Crimean-Congo HFPlague Dengue HFRift Valley fever Ebola HFSARS HepatitisSmallpox InfluenzaTularaemia Lassa feverYellow fever Diseases covered by EPR AnthraxMarburg HF Avian influenzaMeningococcal disease Crimean-Congo HFPlague Dengue HFRift Valley fever Ebola HFSARS HepatitisSmallpox InfluenzaTularaemia Lassa feverYellow fever

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Influenza Pandemics (or probable pandemics)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Influenza Pandemics of 20th Century

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 General Considerations Clinical attack rate Demography Regional / Country specific characteristics Changes since prior pandemics Differences between general and insured populations Pandemic duration State of business continuity planning Clinical attack rate Demography Regional / Country specific characteristics Changes since prior pandemics Differences between general and insured populations Pandemic duration State of business continuity planning

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Clinical Attack Rate Typical range: 25% to 35% Accurate figures harder to find than death rates Varies by age Typical range: 25% to 35% Accurate figures harder to find than death rates Varies by age

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Demography Age structure Pre-existing immunity Age structure Pre-existing immunity

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Regional/Country Specific Characteristics Underlying health of population Travel Preparedness and capacity to face pandemics Health system characteristics Pharmaceutical stocks Pandemic plan and surveillance Capacity to implement contact modification and travel restrictions Underlying health of population Travel Preparedness and capacity to face pandemics Health system characteristics Pharmaceutical stocks Pandemic plan and surveillance Capacity to implement contact modification and travel restrictions

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Changes since prior Pandemics Older population age structure now Antibiotics (penicillin 1928) Virological research and knowledge (influenza 1933) WHO’s global surveillance network (1952) Influenza vaccines (1950s) Antiviral drugs (1970s) Older population age structure now Antibiotics (penicillin 1928) Virological research and knowledge (influenza 1933) WHO’s global surveillance network (1952) Influenza vaccines (1950s) Antiviral drugs (1970s)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Changes since prior Pandemics Better medical treatments (ICUs, ventilator and intravenous fluid support, etc.) Fewer outbreaks of contagious disease, including tuberculosis Improved communication and coordination Greater population density Increased travel Lower overall mortality (despite older age structure) Better medical treatments (ICUs, ventilator and intravenous fluid support, etc.) Fewer outbreaks of contagious disease, including tuberculosis Improved communication and coordination Greater population density Increased travel Lower overall mortality (despite older age structure)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Insured vs. General Population Lower mortality for insured population due to: Underwriting Economic self selection Actively at work (group insurance) Lower mortality for insured population due to: Underwriting Economic self selection Actively at work (group insurance)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Mortality Risk Excess mortality curve: flat, “U”, “V\”, or “W” shape? Coherent scenario for all product lines Gain on payout annuities may partly offset loss from death claims Testing multiple curves: most adverse will depend on product and age mix Insured vs. general population mortality Scarce evidence of lower excess mortality during 1918 pandemic SOA Study using the Delphi Method Differences between annuities, individual life and group life Excess mortality curve: flat, “U”, “V\”, or “W” shape? Coherent scenario for all product lines Gain on payout annuities may partly offset loss from death claims Testing multiple curves: most adverse will depend on product and age mix Insured vs. general population mortality Scarce evidence of lower excess mortality during 1918 pandemic SOA Study using the Delphi Method Differences between annuities, individual life and group life

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Mortality Risk Combined effect of excess mortality and asset depreciation for GMDBs and Seg Fund guarantees Post-pandemic mortality Survivorship echo theory: mortality improves after death of weaker lives Opposite view theory: heavier mortality due to weakening of infected survivors Combined effect of excess mortality and asset depreciation for GMDBs and Seg Fund guarantees Post-pandemic mortality Survivorship echo theory: mortality improves after death of weaker lives Opposite view theory: heavier mortality due to weakening of infected survivors

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Mortality Risk

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Mortality Risk Excess deaths per 1,000 assuming 1 pandemic every 30 years (age weighted to represent insurance portfolio) Swiss Re Model (WW, 2007)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Morbidity Risk Disability Income products Increase in incidence rates for plans with short EP Increase in termination rates due to excess mortality Health insurance Increase in hospitalizations and prescription drugs Effect expected to be much smaller than mortality Resources CDC Pandemic Influenza Resources Website “The Economic Impact of Pandemic Influenza in the United States: Priorities for Intervention” by Meltzer, Cox and Fukuda Disability Income products Increase in incidence rates for plans with short EP Increase in termination rates due to excess mortality Health insurance Increase in hospitalizations and prescription drugs Effect expected to be much smaller than mortality Resources CDC Pandemic Influenza Resources Website “The Economic Impact of Pandemic Influenza in the United States: Priorities for Intervention” by Meltzer, Cox and Fukuda

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Persistency & Lapse Risk Temporary increase in persistency for insurance products Temporary increase in policy loans or partial withdrawals from UL policies Temporary increase of surrenders for savings type products Temporary increase in group business persistency as groups lacking resources to go to market Temporary increase in persistency for insurance products Temporary increase in policy loans or partial withdrawals from UL policies Temporary increase of surrenders for savings type products Temporary increase in group business persistency as groups lacking resources to go to market

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Cash Flow Mismatch Risk Sharp increase in claims and withdrawals from UL policies and savings products may create unexpected mismatch Increase in claims and withdrawals may be somewhat offset by increase in persistency of insurance products and increase in new business Sharp increase in claims and withdrawals from UL policies and savings products may create unexpected mismatch Increase in claims and withdrawals may be somewhat offset by increase in persistency of insurance products and increase in new business

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Deterioration of Asset Values Wide belief that pandemic will affect negatively the global economy Effect will depend on duration, infection and death rates Wide belief that pandemic will affect negatively the global economy Effect will depend on duration, infection and death rates

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Deterioration of Asset Values Most of the impact on GDP will come from the demand side (85-90%) IncreaseDecrease Health care servicesPoultry industry PharmaceuticalTourism, travel & public transportation Medical suppliesEntertainment & Sports Funeral servicesRestaurants Non-perishable foodRetailers of non essential goods WaterProviders of non essential services Telecommunication & InternetProviders of services that could spread disease (dentists, hairdressers, etc.) Construction & real estate Oil & gas Financial & insurance services Most of the impact on GDP will come from the demand side (85-90%) IncreaseDecrease Health care servicesPoultry industry PharmaceuticalTourism, travel & public transportation Medical suppliesEntertainment & Sports Funeral servicesRestaurants Non-perishable foodRetailers of non essential goods WaterProviders of non essential services Telecommunication & InternetProviders of services that could spread disease (dentists, hairdressers, etc.) Construction & real estate Oil & gas Financial & insurance services

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Deterioration of Asset Values Reaction of capital markets more difficult to predict Psychological “flight to safety” reaction: shift in demand from shares and corporate bonds to government bonds, gold and money market Extent and duration of share price losses greatly depend on the severity of the pandemic and its impact on the real economy Reaction of capital markets more difficult to predict Psychological “flight to safety” reaction: shift in demand from shares and corporate bonds to government bonds, gold and money market Extent and duration of share price losses greatly depend on the severity of the pandemic and its impact on the real economy

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Deterioration of Asset Values Credit spreads surge resulting from sales of corporate bonds Price increase on government bond markets and associated lower interest rates will probably tend to last longer: central banks expected to adopt expensive monetary policy to mitigate the shock, particularly if there is a trend towards deflation Credit spreads surge resulting from sales of corporate bonds Price increase on government bond markets and associated lower interest rates will probably tend to last longer: central banks expected to adopt expensive monetary policy to mitigate the shock, particularly if there is a trend towards deflation

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Deterioration of Asset Values Possible increase in asset defaults Results of the “SOA Study of the Effect of a Flu Pandemic on Economic Values using the Delphi Method” were inconclusive Possible increase in asset defaults Results of the “SOA Study of the Effect of a Flu Pandemic on Economic Values using the Delphi Method” were inconclusive

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 New Business Risk Increase in demand for non face-to-face sales of term insurance products Increase in exercises of guaranteed insurability benefits Decrease of New Business for Payout annuities, savings type products and group business (o/t optional group life) Increase in demand for non face-to-face sales of term insurance products Increase in exercises of guaranteed insurability benefits Decrease of New Business for Payout annuities, savings type products and group business (o/t optional group life)

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 New Business Risk Company’s business continuity plan and sales strategy during pandemic Level of sales and new business staff Level of resources to provide evidence (APS, etc.) Customers willingness to meet sales people face-to-face Post-pandemic level of New Business Company’s business continuity plan and sales strategy during pandemic Level of sales and new business staff Level of resources to provide evidence (APS, etc.) Customers willingness to meet sales people face-to-face Post-pandemic level of New Business

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Expense Risk Temporary increase in expenses related to activation of business continuity plan, e.g. staffing costs to replace sick people and handle extra claims

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Reinsurance Risks Increased risk of reinsurer insolvency Greater exposure to mortality risk with no or little offsetting gains from life annuities or LTD Reinsurer’s age mix and assumed excess mortality curve Rating agencies believe that reinsurers can sustain pandemic Reinsurer’s preparedness for a pandemic Liquidity of assets and ability to make timely payments Ability to support new business Increased risk of reinsurer insolvency Greater exposure to mortality risk with no or little offsetting gains from life annuities or LTD Reinsurer’s age mix and assumed excess mortality curve Rating agencies believe that reinsurers can sustain pandemic Reinsurer’s preparedness for a pandemic Liquidity of assets and ability to make timely payments Ability to support new business

2008 Seminar for the Appointed Actuary Colloque pour l’actuaire désigné Seminar for the Appointed Actuary Colloque pour l’actuaire désigné 2008 Reinsurance Risks Reinsurance market situation after a pandemic Reduction in capacity Price increase Reinsurers are normally not very exposed to the financial market For reinsurance agreements with profit sharing (and typically higher margins), reinsurer’s solvency is improved and loss carry-forward provisions mean no experience refunds for cedants in the years following pandemic Reinsurance market situation after a pandemic Reduction in capacity Price increase Reinsurers are normally not very exposed to the financial market For reinsurance agreements with profit sharing (and typically higher margins), reinsurer’s solvency is improved and loss carry-forward provisions mean no experience refunds for cedants in the years following pandemic