Disaster on the wing: avian flu flaps its wings in Southeast Asia, and the global economy shudders.

In a scenario eerily similar to the emergence two years ago of the deadly sudden acute respiratory syndrome, or SARS, global health officials are keeping a wary eye on the development of a strain of avian influenza that is highly contagious among chickens throughout the Pacific Rim, and is proving lethal to the small number of humans so far infected.

According to the World Health Organization, as of Oct. 11, there have been 117 confirmed cases of avian flu infection in humans. Of those, 60 have been fatal, giving the disease a very disturbing fatality ratio of 51.3%. Confirmed human cases have been reported in only four countries so far--Vietnam, Cambodia, Thailand and Indonesia. Vietnam has been hardest hit, with 91 cases and 41 deaths.

But there are reasons for officials in other countries to be concerned. Aside from the fact that Vietnam, Indonesia and Thailand have extensive trading ties to many other countries, the bird form of the virus has been reported in Korea, China and Russia as well. In fact, the strain of influenza virus involved was first identified in Hong Kong in 1997, where it probably spread from neighboring Guangdong province in China. At that time, the virus infected 18 people, killing six of them.

The sudden appearance in 1997 of such an efficient killer panicked officials in China and Hong Kong into ordering the killing of an estimated 1.5 million chickens, mostly in Hong Kong, to control the spread of the disease. For a time, that drastic measure seemed to have worked.

But with the re-emergence last year of the same bird flu strain, dire predictions of the disease's likely course are shaking governments worldwide. In August, the Netherlands imposed a ban on keeping poultry outdoors, hoping to keep an estimated 5 million free-range chickens, turkeys, ducks and geese from contact with migratory birds from Russia and Asia.

In the meantime, medical and veterinary experts from the 25 European Union countries held a summit in Brussels to discuss cooperative measures among the countries and international organizations such as WHO and the United Nations Food and Agricultural Organization to contain the disease.

In a speech to the United Nations in early September, U.S. President George W. Bush also called for an international partnership to improve information and sample sharing among agencies tracking avian flu.

The nearest parallel to what might happen with an avian flu pandemic is the SARS outbreak of late 2002 and 2003, said Fariborz Ghadar, director of the Center for Global Business Studies at Pennsylvania State University's Smeal College of Business Administration. "Immediately, it hurt the airline industry, and many companies closed down and sent their people home" he said.

SARS also created border security concerns, such as in Canada when it appeared in Vancouver, a major air travel link with Asian countries, he said.

Insurance Implications

The WHO recorded 8,096 SARS cases worldwide, 774 of them fatal. The estimated economic losses associated with SARS range from $5 billion to $10 billion, an estimate Ghadar believes is probably low. Insured losses are uncertain.

"We don't have any estimates of total insured losses," said Loretta Worters, spokeswoman for the Insurance Information Institute. "The areas that would be susceptible would be workers' compensation and perhaps business interruption insurance, business clean-up and travel insurance. But business owners policies typically cover only interruptions caused by physical damage to a facility."

Environmental impairment liability contracts typically exclude "naturally occurring substances" under the definition of "pollutant" said Worters. This would preclude coverage for SARS under EIL policies. Property decontamination costs and other related claims would not be covered under a standard industry policy.

In the aftermath of the SARS outbreak, officials in Hong Kong appointed a committee of health experts to draw up a "lessons learned" report. The committee's report, released in August 2003, said that better coordination between national and local health agencies is critical to containment of a potentially dangerous disease outbreak. Communication and public sharing of data also are indispensable, the panel said.

In one sense, health officials and businesses are in a better position to deal with avian flu than they were with SARS, said Ghadar, because science knows more about this virus at the outset. "We know how to contain it," he said.

Containment at this point involves destroying flocks of birds in which the virus shows up and limiting human contact with infected birds. But that's assuming the virus doesn't mutate into a form that can be easily passed from human to human. Once that genetic leap is made, all bets are off. "Once it goes into the human population like that, it's going to have a significant impact," said Ghadar.

The food industry likely will be hit hard by avian flu, given the 1997 Hong Kong outbreak, which led to the destruction of 1.5 million birds as part of the containment effort. Ghadar said international supply chains for poultry and waterfowl will be disrupted, with trickle-down effects on restaurants and other food outlets.

Insured losses from those disruptions will likely be minimal on that front. According to the Insurance Information Institute, animal mortality and product recall coverages would not normally apply to poultry and waterfowl stocks. Business interruption claims also would not likely apply, since such policies normally require some sort of physical damage to plant and equipment.

Workers' compensation claims can mount, if the disease spreads widely enough to affect large numbers of workers on farms, in food processing plants and in other areas that bring workers into close contact with infected birds, said the III.

Another, less predictable, avenue for claims would be litigation for physical or financial harm caused by a spread of the virus through the food supply, according to the III.

In a 2004 report entitled "Catastrophe, Injury and Insurance," catastrophe modeling company Risk Management Solutions devoted a section to the threat of a flu pandemic, and offered a possible scenario for an event similar to the 1918 pandemic. The impact on the United States of a flu pandemic that severe would be about 10 million infections and 200,000 deaths, said the RMS study, citing estimates by the U.S. Centers for Disease Control and Prevention.

RMS calculated possible insured losses--in the United States alone--of $41 billion.

The numbers posed by the RMS model dwarf anything that SARS or avian flu has presented so far, but what worries health officials and businesses about these diseases are, first, the high ratio of deaths to infections, and second, the ability for infectious disease to spread rapidly around the world today. "We recently interviewed about 250 CEOs around the world and asked what keeps them up at night, and one of the issues is the speed by which disease goes through the system," Ghadar said.

With today's rapid transport of people, animals and products around the world via air travel, infectious diseases are much more difficult to isolate. "Superimpose plane flights patterns into SARS distribution, and you see a very high correlation," he said.

Lessons Learned

If the avian flu strain now lurking in Southeast Asia turns into the next great pandemic, multinational businesses and health-care workers may be better prepared to deal with the disruptions, thanks in part to SARS. Multinational companies such as the information technology provider Cisco Systems developed networks that allowed much of their work force to work from home in the event of dangerous disease outbreaks. According to Ghadar, Cisco's system worked so well during the SARS outbreak that the Chinese government approached the company to find out how it works.

Another lesson learned from SARs is that multinational health efforts such as those of the WHO are more valuable than previously thought. The ability of the WHO to pull together information from, and coordinate action among, disparate national and local health agencies was key to keeping SARS in check, said Ghadar.

Tim Daniel, chief financial officer of International SOS, a company that provides international medical assistance, health care and security services for corporations and other organizations, said his company's operations in the countries so far affected by avian flu are getting a lot of inquiries from people working with client companies. But perhaps more significant now than in the past, the headquarters of client companies, many in the United States, also are calling to ask about risk-mitigation strategies, he said.

There is so much interest in contingency planning for avian flu that a teleconference hosted by International SOS on the topic, held less than a week before Hurricane Rita struck the U.S. Gulf coast, drew more than 200 participants, "an unprecedented turnout, given that these participants were also involved in their companies' pre- and post-hurricane planning" said Daniel.

International SOS has a team of 20 experts, mostly medical professionals, working on the avian flu threat, consulting with client companies about how to best protect employees, deal with factory warehouse disruptions and other contingencies. Companies at greatest risk of business disruption are those with "significant supply chain dependencies," said Daniel. Those companies are concentrated in China, Thailand, Vietnam and elsewhere in Southeast Asia.

"They, along with companies that had a near-miss with SARS, are the companies that tend to be further along in their contingency planning," said Daniel.

Some of the contingencies companies are prepared to put in place, following their SARS experiences, include keeping workers quarantined on the job site to prevent them from getting infected, paying employees to stay home, screening workers before they get to the workplace and moving operations from one site to another, said Daniel.

Along with the risk-mitigation planning inspired by the SARS scare, some insurers also developed coverage options targeting the impact of disease outbreaks. Among them, German insurer Allianz Fire & Marine Insurance Japan launched a "SARS expense insurance" product in Japan, designed to cover business interruption related to a future outbreak of the virus.

In the immediate aftermath of SARS, the China Insurance Regulatory Commission approved a short-term health policy specifically for SARS, and gave eight insurers permission to market the coverage.

London-based insurance broker Jardine Lloyd Thompson's Hong Kong affiliate launched "health emergency loss protection," similar to Allianz's Japan product, which covers business interruption caused by infectious disease outbreaks. At the time, JLT saw a niche opening for such coverage, as SARS scared many commercial insurers into writing exclusions for infectious disease into business interruption policies. The product is aimed at the hospitality segment in particular--hotels, restaurants, theme parks and convention centers, among others.

JLT spokesman Avril O'Connor said the broker negotiated one of the largest business interruption claims related to SARS in the fall of 2003, as the outbreak waned. The Mandarin Oriental International Ltd. hotel chain settled with its insurers for $16 million in business interruption claims related to low occupancy rates at its Asia-Pacific hotels, particularly the group's flagship hotel in Hong Kong.

The complex negotiations that went into settlement of the claim involved management of the hotel chain, JLT's Hong Kong, Singapore and London offices and claims specialists from JLT affiliate Echelon, said O'Connor. The insurers and their appointed experts presented their views of coverage amount, and as the claims amounts advocated by both sides diverged, "negotiation skills were vital," said O'Connor.

JLT launched its specialized business interruption product the following June.

Key points

* P/C insurance lines likely to be affected by an avian flu pandemic are workers' compensation and business interruption.

* Another avenue for claims would be litigation for physical or financial harm caused by a spread of the virus through the food supply.

* Risk Management Solutions calculated possible insured losses from a flu pandemic of $41 billion in the United States.

A Lethal Pedigree

The avian influenza virus is known to scientists as H5N1--the H and N letters denote the two surface proteins recognized by the human immune system of the eight that flu viruses carry.

First identified in Hong Kong in 1997, where it infected thousands of chickens, avian flu disappeared after it infected 18 people, killing six of them. Government action in Hong Kong and neighboring Guangdong province in China forced the killing of about 1.5 million chickens to stop the spread of the disease.

Scientists with the World Health Organization believe the strain went underground "after that, circulating within the natural gene pool of all flu viruses--waterfowl--in southern China. The virus caused panic again in February 2003, when two members of a Hong Kong family came down with the illness. One of them died. The family had been traveling in southern China just before showing symptoms of the disease.

In January 2004, laboratory tests confirmed more cases of the H5N1 strain in people with severe respiratory disease in northern Vietnam, marking the beginning of the current cycle of infection.

So far, the H5N1 strain hasn't shown the ability to jump from human to human. Scientists believe it still must be passed on to humans from birds, particularly chickens, for people to get sick. But there are two worries--the high ratio of fatalities to infections, and the likelihood that the virus will undergo a mutation that will make it easy to spread among human populations. With that development, scientists doubt its spread can be effectively contained.

Once a "subtype" of H5N1 develops that can easily pass between humans, it would "mark the start of an influenza pandemic," the WHO said in a statement.

There are 15 known strains of avian flu, which was first identified in Italy more than a century ago, according to the WHO. Various strains have cropped up in the United States (1983-84), Mexico (1992-95) and Italy (1999-2001), among others. Most of those strains have caused little or no infection in humans.

Normally, flu strains have a benign existence in the avian gene pools, causing little or no illness in the birds that carry them. The strains that typically sicken humans gain that ability from close contact between people and birds, or between birds, pigs and people, as the various flu strains latent in the three species come together, mixing and matching proteins until they hit on a combination that gets them around immune-system defenses.

In April 2005, scientists in Indonesia had determined that the H5N1 virus had made the genetic jump to pigs, giving the virus a greater toehold in the mammal gene pool. Pig infections also are suspected, but not yet confirmed, in China and Vietnam.

Historical patterns show that major flu pandemics break out about three times a century. That's how many there were in the 20th century. The first, the Spanish flu pandemic of 1918-1919, an H1N1 strain, was the most terrifying, and the one that keeps the scientists up at night when they think of avian flu's potential. That episode caused an estimated 40 million to 50 million deaths worldwide and, like the current avian flu virus, was unusual in that it killed young, strong people as easily as the old and sick that are the usual victims of "normal" flu strains.

The last century's other pandemics occurred in 1957-58, an H2N2 strain, and 1968-69, an H3N2 strain outbreak. Neither outbreak was anywhere near as lethal as the 1918 strain. The 1957 strain killed about 2 million more people than would be expected from flu infections in an average year. The 1968 strain is thought to have killed about 1 million more than average.

The WHO estimates that in the United States, typical flu epidemics cost the economy around $5 billion a year in lost productivity and health-care costs.

FLU CHECK: Blood samples are taken from employees at the Ragunan Zoo in Jakarta, Indonesia, Sept. 19, 2005, to test for avian flu after rare eagles, peacocks and other birds at the zoo were infected by the virus.

At a Glance: H5N1 Avian Flu

Projected No. of Deaths in United States: 125,000 to 300,000.

Current cause of infection: Close contact with live, infected poultry.

Why H5N1 is especially feared: Can acquire genes from viruses infecting other animal species.

Symptoms: Fever, cough, sore throat and muscle aches.

Sources: RMS study Catastrophe, Injury and Insurance and the Centers for Disease Control and Prevention

H5N1 Avian Flu's Projected
Insurance Costs

     Group Life    $2,678
Individual Life    $6,433
           AD&D    N/A
  Worker's Comp    $247
         Health    $30,523

Table: Table made from bar graph.

Source: RMS study Catastrophe, Injury and
Insurance