Last Updated 4/30/2018

Issue: The risk of pandemics is one of the most catastrophic threats to the insurance industry. According to the Centers for Disease Control and Prevention (CDC), a pandemic is the sudden outbreak of an infectious disease that has spread over several countries or continents, affecting a large number of people. Pandemics usually come in waves and have the potential to affect all industries. Experts predict a pandemic could potentially affect insurers' operations and various lines of business across all insurance sectors. Severe pandemics also could have an impact on insurers' investments by disrupting economic markets. However, unlike losses from weather-related catastrophes, losses from pandemics do not come from destruction of physical structures.

Pandemic Trends: The world has experienced many pandemics throughout its history. Some of the most devastating pandemics have been the bubonic plague in the 14th century, the measles in the 16th century and small pox in the 18th century. The 19th century experienced tuberculosis, cholera, influenza and polio pandemics.1 The 20th century saw the influenza A (H1N1) pandemic and the acquired immune deficiency syndrome (AIDS) pandemic.

Recent outbreaks—such as Zika, Ebola and others—have heightened awareness of the pandemic threat. However, influenza pandemics have historically been the most prevalent pandemic threat, with about three occurring every century. Compared to seasonal flu viruses, pandemic flu can cause severe disease in young, healthy people, resulting in more illness and deaths. For instance, the highest mortality rate in the 1918–1919 Spanish Flu pandemic was in people aged 20–40 years. Children were the most affected in the 2009 H1N1 pandemic.

A recently released report from the National Academy of Medicine's Commission on a Global Health Risk Framework for the Future (GHRF Commission) predicts at least one pandemic will occur over the next 100 years, with a 20% chance of seeing four or more pandemics within the same time span.2 Additionally, infectious diseases appear to be emerging at an increasing rate. Since new human diseases predominately originate in animals, experts say this increase is likely linked to increased population and animal-human interaction. Additionally, antibiotic resistance, urbanization and globalization also increase the potential for viruses to spread quickly. Failure to predict accurately which viruses should be included in vaccines also can increase pandemic risk. This was evidenced in 2009, when annual flu vaccines did not include the H1N1 virus, resulting in a pandemic. 

Managing the Industry Impact of Pandemic Risk: Pandemics could have serious consequences for insurers and those they employ and insure. Investing in pandemic preparedness and risk management is essential to mitigate operating difficulties and expected losses during a pandemic. Below are some of the ways insurers can address their vulnerabilities to pandemic risk.

  •  Business Continuity Planning

Like traditional disaster recovery plans, business continuity plans are best done well in advance of a pandemic. A comprehensive business continuity plan defines how an insurer will maintain critical operations during a pandemic. The goal is to maintain essential operations during times of workforce illness and stakeholder and supply disruptions. The plan should address actions to take during a pandemic's various stages. It also should outline strategies for replacing ill employees or moving to a telecommuting structure, establishing preventive and containment health care measures, and addressing critical function and leadership gaps. Finally, it should outline how the insurer will resume operations following a pandemic.3

  • Investment and Business Mix

Invested assets can be diversified to offset their vulnerability to pandemic characteristics. Pandemics with longer durations and higher virulence will cause demand shock, resulting in high immediate effects on the economy. Demand for medical services and supplies will escalate. But, demand for other services will decrease as people seek ways to reduce the risk of illness. In contrast, pandemics with shorter durations and lower virulence will cause supply shock. As a result, illnesses and deaths occurring in the short-term will evolve into high absenteeism and productivity disruption in the long-term. Lower productivity on a massive scale could decrease domestic and foreign confidence and add uncertainty to the investment market. This could result in a flight to safer investments, placing domestic companies and global trade at risk.4

Insurers also can mitigate against catastrophic mortality risk by controlling their mix of business. They may limit their in-force business to certain mortality risk tolerance levels. Mortality risk also can be offset by employing internal hedging strategies to their mix of business. This is most commonly done by taking on more longevity risk through annuity products. Premature death of annuity insureds during a pandemic serves, to a certain extent, as a natural hedge against rapid claim increases for life insurers. Additionally, insurers can hold a diversity of ages within their product portfolio. They also can diversify into other product lines less sensitive to pandemic risk.

  • Risk Transfer

Reinsurance is a common tool insurers use to manage potential claim shocks from pandemics. Reinsurance allows insurers to transfer a specific portion or category of risk out of their portfolios to reinsurers' portfolios. Transferring these risks benefits insurers by stabilizing their earnings and increasing their capacity to issue more business. Stop-loss reinsurance is a common choice for protection from pandemic risk. Stop-loss is a form of nonproportional reinsurance where the reinsurer makes a payment if the ratio of claims to premium (claim ratio) exceeds a certain threshold, called the attachment point. Payments cease when the claim ratio reaches its exhaustion point. This offers the insurer protection against any sudden spike in claims experience during a pandemic. Excess-of-loss is similar to stop-loss, except coverage is related to a single loss event or risk. The World Health Organization (WHO) four-phase pandemic alert system is a common trigger point for many pandemic reinsurance treaties structured as catastrophe excess-of-loss. Another option is quota share, a form of proportional reinsurance, where the reinsurer assumes a specific percentage of every risk being reinsured. Thus, the insurer and reinsurer would share proportionally in all premiums and losses from a pandemic shock.

Traditional reinsurance has many benefits, but it also can be costly and present issues around counterparty risk. As an alternative to traditional reinsurance, insurers can use industry loss warranties (ILW) to mitigate financial losses from pandemics. ILW contracts are based on industry loss experience instead of insurer-specific losses. However, counterparty risk can still be a concern. Insurers also may choose to transfer pandemic risk to the capital markets by using insurance-linked securities, like extreme mortality bonds. By issuing extreme mortality bonds linked to a portfolio of lives, insurers offset adverse mortality experience from diseases. The mortality rate trigger is usually set by an official source, such as the CDC. Mortality swaps are another option, where payment is triggered if a specific mortality index exceeds a certain level, up to its exhaustion point.

Capital market solutions for pandemic risk continue to evolve. This year, the World Bank launched the "pandemic bond" to provide funds to low-income countries facing a large-scale disease outbreak. The bond is the first insurance for pandemic risk and shifts the pandemic response focus from reactionary to proactive.5

Status: Pandemic exposure can present significant tail risk to insurers. The life and health insurance industries will be most severely impacted. However, the property/casualty (P/C) industry could see substantial losses from secondary impacts. To further explore the risk of pandemics to the health, life and P/C industries, the Center for Insurance Policy and Research (CIPR) held an event titled "The Risk of Pandemics to the Insurance Industry" on March 27, 2015. The event covered business continuity planning, the potential financial impact to the industry, modeling and risk management considerations, and capital market solutions.

In 2017, state insurance regulators, working through the Financial Analysis (E) Working Group of the Examination Oversight (E) Task Force, added guidance on pandemic prospective risk for health insurers to the NAIC Financial Analysis Handbook. Additionally, state insurance regulators actively monitor and stress test insurers' risk-based capital (RBC) figures to determine whether an insurer has enough capital to sustain catastrophic events, such as pandemics. The life RBC formula includes factors to establish minimum capital requirements to address deterioration of mortality and morbidity experience—including those from pandemics. The Life Risk-Based Capital (E) Working Group of the Capital Adequacy (E) Task Force maintains the RBC formula for life and health insurers.

1 Rowe, J., 2017. "Deadly Pandemics Through History," U of T Magazine, accessed at
2GHRF Commission (Commission on a Global Health Risk Framework for the Future). The Neglected Dimension of Global Security: A Framework to Counter Infectious Disease Crises, accessed at (doi: 10.17226/21891).
3 Kirvan, P., 2009. "Using a Pandemic Recovery Plan Template: A Free Download and Guide," accessed at
4 Van Broekhoven, H., E. Alm, T. Tuominen, A. Hellman, and W. Dziworski, W., 2006. Actuarial Reflections on Pandemic Risk (Tech.). doi:European Commission, accessed at
5 World Bank, 2017. "Pandemic Emergency Financing Facility: Frequently Asked Questions" [Brief], accessed at