Flu pandemic: a real threat: deaths and claims paid by life insurers would dwarf those generated by other natural disasters and terrorism.

History has shown that influenza pandemics happen with frightening regularity and will happen again. There have been 31 pandemics in the past 500 years and three in the past century, including the 1918-1919 "Spanish flu" that killed 20 million to 40 million people worldwide and 500,000 in the United States.

Influenza experts fear a similar pandemic is on the horizon because a new virus strain--the H5N1 avian virus--needs only to mutate into a form that can spread human to human. The Spanish flu and H5N1 strains share disturbing characteristics, such as turning the body's own immune system against itself, killing quickly and hitting the healthiest people hardest, not just the very young and very old. In 1918 one-quarter of the U.S. population was infected, and 2.5% of those died. The table, right, projects the effects of a similar contagion on today's U.S. population. (Note the concentration in the 15-44 ages).

Unlike 1918, we are a more mobile, urban society where a virus can move faster than efforts to quarantine it. Hospitals would be overrun, and despite medical advances, experts project that many would die within 24 hours of the onset of symptoms with little hope of treatment. Meanwhile, the flu and the fear of the flu would paralyze economies.

A pandemic ripple effect would trigger industrywide changes in group life. In an average year, there are $15 billion to $20 billion actual paid claims for all group life insurers in the United States. Based on 1918-1919 experience, a flu pandemic could more than double group life claims. Imagine the impact this would have on your company's short-term cash flow, and the steps it might take to recoup losses and build cash reserves.

Risk selection is likely to be different and more limited, affecting the way your business is priced, underwritten and sold. Markets would harden as coverage becomes much more expensive as providers drop out of the market and the remaining providers try to recoup their losses. Currently, the group life market is extremely price sensitive--you can win or lose business on price alone. Employers may reduce the level of coverage they offer or pass more cost on to their employees.

Insurers could lessen a pandemic's impact by proactively taking these approaches:

* Manage your risk. With this type of an event, a broad geographic and industry spread may reduce your risk. Insurers with business in multiple urban areas or fewer urban areas and those with lower population density would fare better than insurers that have a concentration of risk in a few large urban areas.

Some industries will be more susceptible than others. If people travel regularly and return to a home office, they can carry the virus back with them and infect more people. While it's not currently a normal part of the underwriting process, it may be time to start asking prospective clients how much their staff travels, the percentage of time they spend away from the office and the average number of days they are out during the year.

* Update your business continuity plan. Aside from higher claims, how well-equipped are you it a pandemic depletes your work force? Does your plan address a scenario where death and illness of workers in their prime leave you short-staffed in critical areas?

* Face the reality of a flu pandemic. While the focus may have been on terrorism lately, the recent Indian Ocean tsunami and the fact that pandemics are natural, recurring events demonstrate the need to remember the broader picture. Terrorism can't be predicted, and it isn't the only thing that can impact your business.

* Join the call. Influenza authorities from around the world warn that preparedness efforts are lagging. Our current vaccination production process is outdated; it is the equivalent of trying to run your business using 1977 personal computers. We need to begin the shift from using chicken eggs to produce the vaccine (a method developed in the 1950s) to the use of cell technology. Authorities worry that governments and vaccine companies are dismissing the potential of a flu pandemic as hypothetical when it is, in fact, on the horizon. Business leaders can help by joining the call to Congress and other leaders to step up preparedness efforts.

Pandemic's High U.S. Toll

          Projected Deaths
Age       Based on Current
in          Population and
Years   Deaths in 1918-1919

  <5                233,200
5-14                 74,553
15-24               214,582
25-34               378,639
35-44               268,602
45-54                43,948
55-65               123,451
 >65                426,689
Total             1,763,664

Contributor Erik Rasmussen is vice president, Risk Management, for ING Re's Group Life, Accident and Health Reinsurance operation, based in Minneapolis. He may be reached at [e-mail].