Avian Influenza-H5N1 Implications for the Insurance Industry Casualty Actuarial Society Meeting San Francisco Al Fine - Willis Risk Solutions

2 Facts Influenza viruses are highly species specific Avian influenza is an infectious disease caused by the “A” strain of the virus Since 1959 only 10 documented incidences where an “A” strain influenza has infected humans H5N1 is highly pathogenic virus transmitted by migrating birds to farm poultry; humans infected tend to work with or ingest sick poultry Disease spread via intersecting migratory flyways and international human and product movement A major pandemic is likely when disease mutates to allow efficient transmission between humans-at least one case has been identified

3 History 1997 Hong Kong Outbreak –first known cases of bird to human transmission; period defined as the “Second Wave” According to WHO, in 2006 H5N1has killed a person every four days- double the 2005 rate As of October 18, 2006: 256 Diagnosed Cases 151 Deaths 50+ Cases in Indonesia in Cases in Viet Nam Cases in 10 countries located in Southeast Asia, Central Asia, Europe, and the Middle East

4 Scenarios Congressional Budget Office Assessment Severe: US Exposure- 90 Million Cases/2 Million Deaths Mild: US Exposure- 75 Million Cases/100K Deaths Fitch 400 K Deaths Projected in Europe 209 K Deaths Projected in US Y2K or 9/11? Potentially 25% of the Workforce Infected on Global Basis Broken Supply Chains/Border Closings

5 Risk Factors Population density and demographic of infected population Speed of Infection and ability to quarantine Availability of cure and logistical, political and financial impediments affecting distribution Duration of disease and lingering economic and social effects of countermeasures

6 Insurance Exposures Employee Benefits Health and Welfare Life Property/Business Interruption/Political Risk Contamination Civil Authority Supply Chain General Liability Premises Liability Strict Liability in Tort Independent Contractors Workers’ Compensation/Employers’ Liability Sole Remedy? Number of Occurrences Foreign Voluntary Compensation

7 Implications for Insurers and Reinsurers Exclusionary Language to Remove Ambiguity Coverage Definition and Rationing Arguments for Coverage Based On Public Policy Concerns Emergence of Potential New Case Law

8 Possible Financial Implications Loss impact uncertain WC/GL flu-related claims up WC/GL non-flu-related claims down as businesses shrink or close Economy Suffers Revenues & Payroll down  Premiums down Stocks & Bonds lower  Assets down  Less money to pay claims Predicted 2% - 5% hit to assets on $4 trillion in assets = $80 billion - $200 billion or 30% to 80% of surplus Investment Downgrades for Insurers- combination of underwriting losses and portfolio losses

9 New Opportunities? Contingent Business Interruption Example: ABC Co. performs accounting services for private schools on an outsource basis Avian flu  Excessive Absenteeism (Teachers & Students)  School Closures  Reduced Income to ABC Co.  Need for Contingent Business Interruption coverage Could possibly be done w/parametric trigger (e.g. pay $100,000 if U.S. incidences exceed 50,000) to make loss quantification easier

10 H5N1 Data Tracker World Health Organization: UN Food and Agricultural Organization: cards/special_avian.html cards/special_avian.html US Center for Disease Control: