1. 2007 General Meeting Assemblée générale 2007 Montréal, Québec 2007 General Meeting Assemblée générale 2007 Montréal, Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Pandemics – Where are We? Definitions and History of Pandemics Implications of Pandemic for Insurance Companies Modeling Impact of Pandemics on Insurance Portfolios

3. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 History of Pandemics History of Pandemics in the 20 th century: –1918 Spanish Flu (most severe) Over 40 million deaths in 60 countries –1957 Asian Flu 1 million deaths –1968 Hong Kong (mildest) 700,000 deaths

4. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Characteristics of Pandemics The most common characteristics are: 1.The ability to cause illness on a global basis 2.Little or no pre-existing immunity 3.Potential for serious complications 4.Virus is new subtype 5.No vaccines available in the early stages

5. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Inter-pandemic phaseLow risk of human cases1 New virus in animals, no human cases Higher risk of human cases2 Pandemic AlertNo or very limited human-to-human transmission 3 New virus cases human cases Evidence of increased human-to- human transmission 4 Evidence of significant human-to - human transmission 5 PandemicEfficient and sustained human-to- human transmission 6 World Health Organization phases of pandemic alert

6. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Current Situation Recent Outbreaks –SARS: In 2002 SARS infected 8,098 people in 25 countries, 774 deaths Cost to global economy - $40 billion* Transported by air travel *Roche, CDC

7. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Avian Flu Recent Outbreaks: Avian Flu – Strain H5N1 –Characteristics as classified by CDC –An influenza pandemic resulting from it –Currently little pre-existing immunity to the virus among humans –No vaccines are currently available for human use –Current status –To date, over 281 people infected and 169 deaths –Represents a mortality rate of over 60%

8. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Avian Flu - Potential Outcomes According to the World Health Organization (WHO) –Continued spread via flyways of migrating birds –North America is one of the flyway connections

9. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Future Scenario The Future Outlook –Epidemiological models from the Centers for Disease Control and Prevention, Atlanta, USA 2 to 7.4 Million deaths globally Impact greatest in low income countries High income countries –Scientific consensus that: Avian pandemic will sicken 20% of the world Result in absenteeism of 40% of global workplace

10. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Future Scenario * Comparing Costs Cost the global economy $40 billion SARS 2003 Cost an estimated $10 billion in the US and Canada Northeastern Blackout Estimated economic losses of over $100 billion Hurricane Katrina 2005 Projected to cost $800 Billion a year Pandemic Flu *World Bank and Risk Management Solutions figures

11. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Implications of Pandemic for Insurance Companies Risk is opportunity Core competency

12. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Approach to Planning Denial or lack of interest in problem Recognition of problem Willingness to discuss and prepare Learn what needs to be done Implement knowledge learned Sustained readiness as new normal

13. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Risks to Manage Economic Business continuity Claims surge Reinsurance

14. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Risks to Manage - Economic Risks Global recession is possible Asset values may decline Liquidity risk Estimated 5% drop in GDP

15. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Risks to Manage - Business Continuity Employee absenteeism Disruption of infrastructure –Transportation –Commerce –Public Safety –Health Care Communication is key

16. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Risks to Manage - Claims Surge Medical claim payments Life insurance benefits

17. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Risks to Manage - Reinsurance Capitalization of reinsurance market Net amounts at risk – direct vs. reinsurance

18. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Modeling the Impact of Pandemics on Insurance Portfolios Help life and health companies manage risk and long term viability Quantify the potential impact of various pandemic scenarios Estimate the impact of reinsurance under various scenarios and reinsurance arrangements

19. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Financial Impact for Insurance Company Location of exposure Net amount at risk Conservatism of reserves Product diversification Liquidity

20. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Pandemic Model Structure Input Model Assumptions Scenario Testing Output Reinsurance Options

21. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Input Normal Mortality Exposure Data

22. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Input Normal Mortality Exposure Data –Age –Health Status –Product

23. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Observations – Insured vs. Population Access to health care Ability to distance oneself Effect of underwriting Employed lives Educational level Urban lives Nonsmokers

24. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumptions Morbidity Mortality –Shape of Curve Duration of Pandemic Effect of Vaccines Effect of Antiviral Medications

25. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Morbidity The attack rate of an influenza virus determines the percent of the population that becomes infected. Attack rates can vary by age with illness among school age children tending to be highest.

26. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Mortality The excess deaths resulting from the influenza virus can vary by age and underlying health status.

27. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Shape of Mortality Curve The excess deaths by age during the 1968 pandemic followed the typical U shaped curve. The excess deaths by age during the 1957 pandemic were highest at the oldest age brackets.

28. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Shape of Mortality Curve The excess deaths by age during the 1918 pandemic resembled a truncated W. Excess deaths by age during a severe modern pandemic would likely resemble a W.

29. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Duration of Pandemic Pandemic flu outbreak can last several weeks. Several historic pandemics occurred in waves.

30. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Vaccines Vaccines impact transmission of disease and therefore impact the rate of infection.

31. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Model Assumption - Antiviral Medications Antiviral medications reduce the mortality associated with influenza.

32. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Scenarios Mild Pandemic (1968 – Hong Kong Flu) Moderate Pandemic (1957 – Asian Flu) Severe Pandemic (1918 – Spanish Flu) Center for Disease Control FluAid Model Historical Influenza Mortality (1917 – 1994)

33. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Modeling the Impact of Pandemic on an Insurance Portfolio Pandemic Model Estimated excess gross claims due to pandemic Estimated excess net claims – reflect net amount at risk & traditional reinsurance Estimated excess net claims – reflect pandemic cover or catastrophic reinsurance

34. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Reinsurance Options Abnormal Mortality Stop Loss –Known Parameters Pandemic Specific Coverage –Historical Parameters

35. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Reinsurance Options -Stop Loss Covers Straightforward Cover “Reservation” Cover Indexed Mortality Cover

36. 2007 General Meeting Assemblée générale 2007 2007 General Meeting Assemblée générale 2007 Summary Review of pandemics Implications for insurance company Model insurance exposure