What are the Challenges Facing the Reinsurance Industry?

01 March 2007

Bill Skirving, Hannover Reinsurance Group of Africa 

Life… 

The major challenge facing the life re/ insurance industry is the threat posed by avian or bird flu. 

Currently the virus (known in medical circles as Type A, H5N1) can jump from birds to humans, so those people in regular close contact with infected poultry are most at risk. However, the virus cannot, at this stage, transfer from human to human. Nonetheless because the influenza virus changes its genetic make-up regularly, the consensus of medical opinion is that it is only a matter of time before the necessary mutation does take place to enable the virus to become transmissible from human to human. 

Of even greater concern is the discovery of the H5N1 strain in pigs – which are also susceptible to human flu – seen by some as an advance in the genetic mutation necessary to enable the virus to jump from human to human. 

When this does happen the consequences could be much more severe than the dreaded H1N1 Spanish Flu of 1914 – 1918. (In medical research terms the Spanish Flu pandemic is the catastrophe against which all modern pandemics are measured.) 

In general, mortality from influenza is low – around 0.1 per cent (which means that in a population roughly the size of England and Wales, about 12,000 deaths a year are attributed to influenza outbreaks). By contrast the Spanish flu is estimated to have infected around 20 per cent of the worldwide population, with a mortality rate of about 2.5 per cent that killed in excess of 20 million people. The avian flu virus is expected to be even more virulent than the Spanish Flu, although the experts do not yet know exactly how virulent. 

Nonetheless based on the current models, it is predicted that if a pandemic broke out, and 25 per cent of the population of the UK is infected with the avian flu virus (a normal influenza infection rate), and assuming a mortality rate of 2.5 per cent (similar to the Spanish Flu virus), about 360,000 people will die in the UK alone.

However, despite these dramatic predictions, the forecast is not all doom and gloom. A vaccine known as Tamiflu has been developed and has become the drug treatment of choice for ‘Avian Flu’. This is presently being stock-piled by many governments around the world, with most opting to cover approximately 20 to 40 per cent of their respective populations. During the Spanish Flu pandemic there were no vaccines available to treat the disease. 

In short therefore the medical view is that an avian flu pandemic will break out, but what is not known is exactly when this will happen, or how virulent it will be. The economic burden that could be caused by such a pandemic is a further factor that needs to be considered. 

The severe acute respiratory syndrome SARS) outbreak highlighted the effects of air travel and the potential global dissemination of emerging infectious diseases. In February 2003, a physician from Foshan, Guangdong Province China became ill while staying in a hotel in Hong Kong and infected 12 other guests staying in the hotel. From there the disease spread to Vietnam, Singapore, Canada, Ireland and the USA. By April 2003 3,389 cases had been reported, with 165 deaths (a mortality rate of 4.9 per cent). The need for a global response to contain such outbreaks was driven home very effectively. 

SARS claimed 800 lives in total, but it cost the South-East Asian economy an estimated US$11 billion. Cathay Pacific Airways, as one example, saw its traffic plunge by two-thirds, which meant that it had to cancel 45 per cent of its scheduled flights during the SARS scare. 

The Asian Development Bank has estimated that a severe form of avian flu would cost the region between US$250 and 290 billion. Stockpiling Tamiflu is only the start – then comes the cost of hospitalisation, lost productivity, loss of revenue to the airlines, tourist operators and other businesses – from there the costs start heading into the stratosphere. 

Little wonder then, that the industry is so concerned about this threat, and already in parts of Europe, ‘pandemic cover’ is being written by some re/insurers. 

The universe … 

Currently around 25 different companies across the globe offer space insurance. (The first ‘space’ policies date back to the Air & Space Underwriters Inc of the Early Space Insurance Company, formed in 1965). Most of this business focuses on satellites, covering the launch procedure, the deployment, and then the actual operation in space. However this could soon change. 

Two private individuals have already experienced space flight, and stayed for a short time at the International Space Station anyone with a spare US$25 million could probably do the same). Although Space tourism is still in its infancy, according to Virgin Galactic, regular space flights could be offered to the public from as early as 2008, at an estimated cost of around US$200,000. As Jules Verne’s Twenty Thousand Leagues Under the Sea accurately described the nuclear submarine about 50 years before its time; who knows, maybe The Hitchhiker’s Guide to the Galaxy could become more than just an entertaining novel. 

In a separate green universe, found in various patches on Earth, golfers have their own obstacles to overcome (in addition to golf that is). The English courts have recently ruled that a player was liable for an accident, even though he shouted “fore”. The case involved a Southampton golfer whose shot accidentally deflected into the eye of a fellow club member, causing permanent damage to the retina, with the hapless golfer being ordered to pay substantial damages. In addition to the millions of pounds-worth of golf equipment stolen on an annual basis, it is estimated that around 10,000 golfers a year require hospital treatment as the direct result of an injury on the golf course. In summary this simply means that an already expensive game can become exponentially more so if something goes wrong. However this phenomenon is not confined to golf, as there has been a steady increase in injury claims from incidents on cricket, rugby and football pitches, and even tennis and squash courts. 

In the sporting universe in general, an increase in claims activity can be expected this year. At the end of 2006 the Board for Cricket Control in Sri Lanka sued a local Sri Lankan insurance company for US$12 million as a result of the cancellation of a tour by South Africa, due to concerns over the safety of its players. The Sri Lankan Cricket Board had taken out a sports cancellation and abandonment policy, however the insurer has apparently repudiated the claim inter alia on the basis that terrorism was not included in the cover offered. 

No doubt this case will be followed with keen interest by various sports administrators around the globe – with World Cup tournaments due to take place this year in cricket and rugby, as well as the Olympic Games scheduled for Beijing in 2008. 

And Everything...

The weather continues to receive more attention than is warranted by mere polite conversation. The threat of global warming appears to be manifesting itself not through simply warmer temperatures, but rather through greater extremes in climatic conditions: 

• in February 2006 a record 26.9 inches of snow fell in Central Park, New York; 

• in July of the same year, the hottest summer on record contributed to at least 150 deaths across the US; 

• in November, Seattle recorded 15.5 inches of rain, the wettest month in 115 years of record-keeping! 

(It is worth emphasising that all of these incidents occurred in the same calendar year). 

From an insurance perspective, these natural disasters are now being studied far more carefully than was perhaps previously the case. As is well known, one of the consequences of the big bash thrown by Katrina and friends in 2005, was that the old climatic models were completely revised. Now data is compiled and analysed far more systematically, and ‘aggregation’ has suddenly become an essential component in any renewal programme. South-East Asia is one area that is of particular concern: 

• in May 2006, 5,700 people were killed and 135,000 homes destroyed in Java as a result of a 6.3 magnitude earthquake; 

• in July another quake off the coast of Java, measuring 7.7 on the Richter scale, killed 800 people and destroyed many fishing boats; 

• in September Typhoon Xangsane hit the island of Luzon in the Philippines, causing flooding and killing 110 – it was the worst storm to hit the city in over 35 years. 

From a re/insurance point of view, why should this be of particular concern? Although Katrina, Rita and Wilma caused far less devastation (measured in total number of lives lost and properties destroyed) than the earthquakes and storms in Java and Luzon, the value of insurance claims in the US far, far exceeded those in South-East Asia. In the World Bank’s latest report ‘Global Economic Prospects: Managing the Next Wave of Globalisation’ the research shows that global income has doubled since 1980, and predicts that it will double again, in real terms, by 2030. Significant growth is expected in particular, in South-East Asia, which will lead to a burgeoning middle class.

If these predictions are accurate, this will have a two-fold effect on the re/insurance industry. On the one hand there will be a significant increase in the demand for insurance, as the middle class develops and the demand for household furniture, appliances and motor vehicle insurance increases; on the other, if the pattern of natural disasters in this region continues (and there is no reason to suspect that it will not do so) then the risk for re/insurers is likely to increase exponentially as the economic wealth of the region increases. 

...And Finally

In closing, a few thoughts on the relationship between in-house and external legal counsel, and how one goes about selecting external lawyers. The most important part of the entire process is to be found in that one word – ‘relationship’. The relation between external counsel, either as individuals or as part of a firm, and in-house counsel together with the entity he or she serves has as its essence a mutual understanding and trust that should enable both parties to attain their respective goals. 

A corporate entity needs to keep its stakeholders satisfied. For example this means delivering on the bottom line for the shareholders and investors; for the customers it means supplying products that are suitable for the purpose for which they are intended, at a price that offers value – and then the regulators, the environment, the employees all have separate needs that must be taken into account. External counsel can assist the entity in this process by understanding both the overall nature and objectives of the entity, as well as the nuances of the specific matter on which he or she could be briefed. 

Identifying the relationship is one thing, but what does it take to establish it in the first place? There are many competent firms around the globe, all offering similar services; so the first step is differentiation from the competition – be good at something, and be known for it. Be aware that corporate entities have become discerning buyers, therefore being able to show the value that can be added and how this will be done will immediately offer a significant advantage over the competition. Understanding the entity’s business and the challenges it faces should ensure repeatability, and then continually evolving with the changing needs of the market (as the successful entities have had to do) will cement the relationship. 

Not all lawyers, or even law firms are always suited to every matter – where the relationship with the other business party is important or where the matter can be settled before protracted litigation is embarked on, a skilled negotiator will be able to add more value than a tough litigator. Of course the opposite will also be true, depending on the circumstances. Knowing when to use which approach is crucial, and a relationship built on this understanding, and on trust and respect will win every time. 

I wish to record my thanks and appreciation to my colleague, Dr Bill Monday, for his invaluable assistance on the avian flu section – the extensive research and conclusions are his – any errors are mine.

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