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Pandemic Rx: Lexington Insurance Co.

What It Is

Pandemic Rx is an enhancement available to Lexington Insurance Co.'s commercial property policy for acute care medical facilities. Pandemic Rx provides coverage for business-income-loss sustained and extra expense incurred by these facilities during a declared pandemic influenza public-health emergency. The endorsement is triggered by the declaration of a public-health emergency by an authorized public health official within the geographic service area of an insured health care facility. Hospitals likely will see an increase in their total patient population during a pandemic. During a severe pandemic (indicated by high mortality rates) they also will likely see a change in their case mix and reimbursement rates. Due to resource constraints, higher reimbursement elective surgery patients may be displaced with lower reimbursement patients. In addition, there may be an increase in uninsured and underinsured patients. As a result, during a severe pandemic, hospitals are likely to suffer a business income loss, despite a higher patient population. Pandemic Rx is designed to mitigate this.

Why It Is Different

Coverage was launched in 2008. "We believe it to be the first pandemic coverage generally available in the health care insurance marketplace," Lexington noted in the submission.

Pandemics represent a systemic exposure; systemic exposures create significant challenges regarding aggregate loss projection and management. As such, they've frequently been regarded as not insurable.

Pandemic Rx is coverage available on a property policy and is triggered by the declaration of a pandemic. Property coverage triggers typically are tied to direct physical loss or damage.

How They Did It

The development process began in January 2008 around the time the avian influenza virus (H5N1) had its first human-to-human transmission. The development effort involved staff from product development, underwriting, actuarial and legal. The biggest challenge was trying to assess the frequency and severity of pandemic risk. At the time, there had only been roughly a dozen pandemics since the 1700s, including three pandemics that occurred during the 20th century. Such limited frequency data created significant challenges for coverage design and pricing. Of the known pandemics, only the Spanish flu (1918) had resulted in high mortality. FluSurge modeling and academic writings were the only research available at the time. Actuarial staff helped convert statistical and probabilistic data into pricing data. The second challenge was designing the trigger for coverage. Legal staff conducted research to determine which governmental authority may implement a public health emergency under the Health and Human Services' Plan and how hospitals and care facilities may recoup costs associated with responding to a public health emergency.

Measuring Success

Lexington considers a new product to be a success when it effectively addresses the previously unmet insurance needs of our clients. Success of Pandemic Rx is measured using the following metrics:

* New business with Pandemic Rx coverage based on policy count and total gross written premium.

* Renewal business with new Pandemic Rx coverage based on policy count and total gross written premium.

* Renewal business with renewal Pandemic Rx coverage based on policy count and total gross written premium.

* Gross written premium attributable to Pandemic Rx annually over time.

Expert Review

"This policy provides an extra expense (or a type of normal-business interruption) coverage that comes out of a focused understanding of how a pandemic flu outbreak could cause a large financial loss for a health care facility. By itself, this is innovative. But the submission (and, presumably, the development of the product) also (properly) recognizes that the occurrence of losses is likely to hit many insureds at roughly the same time--one of the main characteristics of risks that are typically regarded as uninsurable. Lexington obviously has overcome this problem to their own and their regulators' satisfaction, and that also makes it distinctive and (at least somewhat) path-breaking."


Insurance company executive
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Title Annotation:INNOVATION SHOWCASE: Commercial Insurance
Publication:Best's Review
Date:Jan 1, 2012
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