Dr. Clemens Muth, Dr. Manuela Zweimüller

Pandemic: Prepared for the worst-case scenario

Forecasts on the economic effects of a pandemic differ widely and should be treated with caution. In order to perform adequate and reasonable risk management, however, Munich Re conducts ongoing analysis of the scientific, economic, and insurance aspects.

What a difference a year can make. Hardly a year has passed since the enormous media interest at the beginning of 2006, and the pandemic issue has almost completely disappeared from the headlines – in spite of the fact that no official all-clear has ever been given.

The alert level on the six-point scale published by the World Health Organization (WHO) is still at three; and the incidence of H5N1 infections has even increased. This shows that the media not only influence the risk debate but also shape risk perception. And the public’s current lack of interest in bird flu is no indication of the true peril.

In spite of the momentary calm, experts are convinced that a new pandemic is on the cards. The question is only when it will come and how extensive it will be. There is also a consensus that if the H5N1 virus mutates, bird flu – a disease hitherto restricted to animals – will be capable of triggering a wave of influenza around the globe. If a new variant develops against which humans have not built up an immune defence system, the disease can only be stopped from spreading locally by short-term epidemic control measures.

Past pandemics are scarcely a source of reliable statistical figures

Failing that, insurers would be affected in many ways. But unlike risks emanating from natural hazards, past pandemics are scarcely a source of reliable statistical figures. Better hygienic conditions and medical and technical progress have significantly lowered the mortality rate of the overall population since the beginning of the last century, so that the situation at that time is not immediately comparable with the situation we have today. The only thing we know is that the larger the number of people becoming ill and falling victim to a pandemic, the more extreme the effects in economic and insurance terms.

The business primarily affected by the insurance risk would be life and health, although the exposure in these lines is relatively easy to quantify. The effects on the global economy and on the insurance industry’s investments are more difficult to assess. A risk situation like a pandemic is so complex that the issue must be tackled from all sides.

Munich Re has concerned itself with this topic for years, particularly in life reinsurance and insurance. The scenarios we use are constantly updated and developed, which calls for close cooperation among an interdisciplinary team of experts including health professionals, economists, risk managers, and underwriters. And of course, we keep a close watch on how the threat is developing by continuously analysing all the available data. So if we were confronted with a worst-case scenario one day, we would be fully equipped to deal with it.

Like any other company, however, we must first ensure that our own business can go on if a pandemic occurs. This is something we are prepared for as part of our overall business continuity planning. The WHO advises all companies and public authorities to identify possible shortcomings in this respect by means of checklists. The following pages present an overview of the scientific and insurance-related aspects that need to be considered for risk management purposes in the context of a pandemic.

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