Singh: In this respect, it would be premature to regard the entire insurance industry as a single entity. The industry is much more complex than, say, a poultry breeder’s. We in the Allianz Group cover life insurance, property damage insurance, and credit insurance as well as banking services and asset management.

Another point is that a pandemic is not such an extraordinary event for the industry. Pandemics can be grouped together with catastrophes such as earthquakes and hurricanes. The important difference in the case under discussion is that no valid statistics are available, and no serious assumptions can be made about when and with what impact a virus might strike.

Singh: Allianz constantly uses risk models to illustrate scenarios that, for example, calculate the effects of epidemics, catastrophes and shocks on the capital markets. On the basis of these models, Allianz has developed three new scenarios to evaluate potential burdens for the company if an influenza pandemic were to strike. These scenarios are oriented towards scenarios of both the WHO and the US Congressional Budget Office (CBO).

The focus here is on life and property insurance as well as health insurance and banking. The low-impact scenario assumes an infection rate of 15 per cent, and thus resembles the Hong Kong flu in 1968. The high-impact scenario by contrast, assumes an infection rate of 40 per cent, thus resembling the Spanish flu outbreak in 1918.

In the field of health insurance, Allianz analyses data such as the frequency of visits to the doctor, the number of hospital cases and death rates, making analogies with terror attacks or natural catastrophes.

A pandemic would differ from other crises in that there would be less variation in the impact on different economic sectors, on different types of commercial risk, and on different regions, because all would be struck more or less simultaneously. As an example, capital markets could be expected to react globally, which would mean the insurance industry, as an institutional investor, would be significantly affected.

Singh: A residual risk does remain, but Allianz would be able to cope even with the worst possible scenario of a world-wide pandemic. If this pandemic did not resemble another Spanish flu but, instead, a milder pandemic comparable with Asian flu or Hongkong flu, Allianz would not be faced with serious losses.

Singh: In practical business, total risk depends on a number of various factors. Death rates are, unfortunately, one important variable. Compensatory effects such as the freeing up of private health insurance reserves caused by deaths would assist in keeping Allianz’s financial risks within tolerable levels.

Singh: Sure, panic reactions on the capital markets would lead to a rearrangement of capital into supposedly safe investments. Bond yields in industrialized countries would decline. Not only share markets, but bond prices in emerging economies would fall, but yields would rise and so would volatility.

However, insurers certainly don’t carry capital-market risks alone. In both good and bad times, they share them with their customers. Because insurers invest a large part of policy-holder money in capital markets, the yields for customers would decline by an equivalent amount. So a policy holder with life insurance would receive a guaranteed level of interest, but his share of surpluses and his payout at maturity in such a scenario would shrink. Insurers would also profit from price increases in corporate bonds, which many investors turn to in uncertain times.

In addition, the entire reaction on the capital markets would in all probability be temporary. If emergency measures are effective – the checking of the SARS epidemic is a lesson here – and if a vaccine is available, the capital markets would stabilize again.


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