Life insurers and reinsurance firms would be most likely to be the hardest hit by a bird flu pandemic, says Fitch Ratings, but the agency does not envisage a threat of widespread downgrades to either the life, non-life or reinsurance sectors at present.

In a special report issued today, Fitch says life insurers, non-life insurers and reinsurers would all be affected by any falls in the investment market that could accompany a flu outbreak. Although this could be significant, if the outbreak is relatively short-lived, the overall impact is likely to be temporary. Consequently, Fitch does not envisage a significant threat of widespread ratings downgrades to either the life or non-life sector at present.

“Downgrades would be most likely if the virus mutates to allow human-to-human transmission and leads to a considerable increase in mortality claims or investment market losses,” says Lauren Kalinowski, an associate director in Fitch’s U.S. Insurance Group in New York. “The companies most affected would be those with concentrations of mortality risk.”

Using various published expert opinions, Fitch estimates 400,000 deaths could occur in Europe and 209,000 in the U.S in a bird flu pandemic. Under these assumptions, Fitch considers that the increase in claims could amount to as much as £20 billion in Europe and US$18 billion in the U.S (8% of 2004 U.S. life insurance and reinsurance industry statutory surplus). It is difficult to assess how much of the risk could be passed onto reinsurers, but it is likely to be substantial. Fitch considers that the increase in claims in such a scenario would be tolerable for the life insurance industry. However, some players would likely be more affected than others.

Non-life insurance policies do not tend to offer cover for flu pandemics. If a pandemic were to occur it would probably result in an increase in employee absenteeism, the rating agency says. “However, business interruption due to absent workers is not likely to be covered by business interruption cover, as this type of policy relates more to physical damage or restricted access to buildings. Property and marine policies generally exclude damage due to the spread of infectious disease. Contingency cover, a specialised form of insurance, which tends to cover non-physical damage such as event cancellation, may well include cover relating to disease. However, as this type of insurance tends to be event-specific, the losses arising for insurers are likely to be modest,” it adds.

“Awareness of the risks of a pandemic has risen over the past year and insurers have been encouraged to review their business continuity plans to ensure they would be able to cope with a significant increase in staff absenteeism,” it notes. “Business continuity planning is a factor in Fitch’s rating analysis and thus if BCPs were found to be inadequate this could be a further reason for downgrades, although this too is expected to be limited.”