A new pandemic risk model developed by risk modeller Risk Management Solutions could prompt more life insurers and reinsurers to consider transferring peak mortality risk into the capital markets, according to securitization specialists.
To date Swiss Re is the only carrier to have completed mortality bonds as an alternative to traditional retrocession or risk swapping mechanisms. Its two Vita Capital deals – the first in 2003 and the second in 2005 – were heavily oversubscribed. Both were primarily based on data from actuarial consulting firm Milliman.
But specialists say RMS’s new model, to be launched on June 1, will give investors and issuers a better understanding of pandemic risk than previous actuarial data.
Tanguy Claquin, executive director at corporate and investment bank Calyon, says the RMS model is an important development because it gives investors a second opinion on the risk.
“The new approach is more analytical because it focuses on the dynamics of a pandemic,” he says. “If the numbers generated by the RMS model turn out to resemble the actuarial models, it will be very reassuring for the investment community.”
Alexandre Vigier, also executive director at Calyon, adds that this could lead to an increase in the number of life securitisation deals. “There is considerably more demand from the issuer side than there was a year ago. With a handful of companies looking at life securitisation, the increase in demand is sharp because of the very few deals done to date. We think there will be several additional issues this year.”
American International Group is one company that is considering securitisation in response to a possible bird flu pandemic.
“We have been very aware not just about pandemic flu, but about all sorts of pandemic disease exposures around the world,” says Charles Dangelo, v.p. and senior reinsurance officer at AIG. “We view this not just from the insurance and reinsurance side of the house. We have looked at, and will continue to look at, securitisation options and other alternatives.”
Unlike actuaries’ attempts at modelling pandemic risk, the RMS tool will allow users to model 1,800 possible outcomes across multiple countries – including events that have never happened before. It will also be able to model the potential economic impact of a pandemic on companies’ investments and their productivity losses as a result of widespread absenteeism and forced closure of facilities.
Based on this output, RMS has predicted that there is a 20% chance that the next outbreak of pandemic flu will be more virulent than the last mega-pandemic in 1918 – the worst for 400 years according to Swiss Re. Many believe that, because the return period of pandemics is once every 10 to 50 years and the last one was in 1968, the world is due another.