Historically, the business and the insurance sectors have shown little interest in infectious disease and the emergence of “new” infections, beyond concern for small localised effects. In the insurance arena, disaster or catastrophe insurance has traditionally been of little interest to life insurers and reinsurers compared with property or non-life insurers.
All this has changed in an increasingly interconnected world, where 1.5 billion people cross international borders by air every day, and where a disease outbreak anywhere in the world threatens to become an issue for all countries. Time and distance are no longer barriers to infectious microbes and in terms of health risk: the national has been rendered obsolete and replaced by the international.
Today, when the next infection is only a plane ride or bird flight away, and where a pandemic can quickly erode public confidence and morale, paralyse the normal operations of society and the economy, as well as place extraordinary burdens on healthcare, business and insurance have had to consider a whole new layer of risk. Now many companies are rushing to prepare risk assessment plans assessing how a flu pandemic might affect their core business.
If nothing else, SARS conclusively demonstrated the impact that even a short-lived epidemic could have on consumer confidence, investment and consumer spending. The economic cost of SARS was probably in the region of $US40 billion. The disease produced considerable impact on the travel and hospitality industry. Cathay Pacific’s passenger load factor, for example, fell to only 41 per cent in May 2003 compared with almost 78 per cent for the same month in the previous year.
HIV-AIDS even more, demonstrates how an infectious pandemic can threaten to undermine the viability of states. In South Africa, HIV-AIDS has had a significantly adverse affect on business, due to reduced labour productivity and increased absenteeism and the raised cost of employee’s benefits. The idea of a whole range of new infections with societal and economic impacts like SARS, bird flu or human influenza, presents the business community with a substantial challenge. The internationalisation of risk and threat has transformed the 21st century scene.
Recently, the Asian Development Bank has estimated that even a mild flu pandemic could produce three million deaths in Asia and halt economic growth and significantly reduce trade. Open economies and big exporters of services such as Hong Kong, Singapore and Thailand, would be particularly hit by such a pandemic.
In some cases infectious diseases can impact directly on the insurance sector. The British farming community’s losses during the Foot and Mouth outbreak of 2001, for example, were covered from two sources. The British Government paid compensation for any slaughtered animal, as well as disinfecting and removal costs. The insurance sector provided cover for any consequential loss. In practice this meant that farmers received 100 per cent of the value of the animal from the government and an extra 25 per cent from the insurer, based on an estimate of lost income over the next six months. The full cost of this outbreak to the public and private sector was of the order of ₤8 billion, with the insurance industry’s contribution totalling ₤5 billion.
In the more recent SARS epidemic, the province of Ontario suffered an estimated loss of more than $C2 billion in tourism, including lost income and jobs. Occupancy rates in Toronto hotels fell to 45 per cent compared with approximately 65-70 per cent prior to the epidemic. The cost to the hotel industry exceeded $C125 million. In Hong Kong, hotel occupancy rates plummeted to below 20 per cent during April 2003, compared with 80 per cent in February.
The current avian flu pandemic has already cost the world between $US15-20 billion. Insurers are watching the pandemic develop with some apprehension. The industry’s worst case scenario, assuming that the virus develops the ability to jump directly to humans, would see overall worldwide losses of between $US71 billion and $US200 billion according to a recent report. If the world faced such a pandemic the human costs would also be very high. In the US such a pandemic could cause between 290,000 and two million deaths and 30 per cent of the population could catch flu: the health costs alone could top $US181 billion.
In Australia such a pandemic could cause between 8,000 and 20,000 deaths and perhaps 50,000 hospitalisations. Every aspect of the economy would be affected. Businesses would be confronted by 25-30 per cent absenteeism; people would avoid shops, restaurants, hotels, places of recreation and public transport. The tourist, hospitality and retail sector would all suffer greatly. The movement of goods and perishable foodstuffs could be placed at risk and cause losses. There would be a run on basic foodstuffs, medications, masks and gloves.
As there is little surge capacity in our hospitals, temporary hospitals would have to be established, raising the issue of compensation. Accommodation would also need to be found for the ill and frail living alone who could not care for themselves. Schools, childcare centres, theatres, pubs and race meetings would be cancelled. Home quarantine would remove many from the workforce for two to three months. Government-imposed quarantine and absenteeism would severely disrupt interstate and international trade.
All this would produce a decline in consumer confidence leading to significant reductions in consumption spending. Insurance companies would be faced with claims for lost income from salaries, business loss as well as increased medical costs. The impact on life insurance is must harder to gauge given that the better-off are more likely to have such insurance and presumably might be expected to enjoy better health. On the other hand, they are also more likely to travel overseas and frequent restaurants and other public places, raising the possibility of infection.
Behind all this lie at least two fundamental human truths - pandemics affect all aspects of our society, and the maintenance of a healthy population free from risk represents the human capital necessary for stability, productivity, innovation and growth.