Plagues of the 21 st Century Emile Elefteriadis, FCIA, FSA Swiss Re Life & Health Canada November...

Plagues of the 21st Century

Emile Elefteriadis, FCIA, FSASwiss Re Life & Health CanadaNovember 17, 2004

Agenda

Possible Mortality Catastrophes

Vita Capital’s Principal-At-Risk Variable-Rate Mortality Catastrophe Indexed Note

– aka Swiss Re’s Mortality Catastrophe Bond

Modeling Approaches


Terrorist Attack – Profound difference in ideology – September 11, 2001– Biological, nuclear threats

War- Middle East- North Korea- India and Pakistan- Intervention and escalation- Wars have been relatively frequent


Meteorite Crash– 1908 Tunguska River, 55 meter meteorite

- 15,000 Kiloton (kT) explosion - Hiroshima 12.5 kT- a 1:1900 year event

– 1972 a 10 meter object bounced off earth’s atmosphere.

- Energy release could have been over 20kT

- a 1:35 year eventSource: Target Earth: Present, Past and Future. B. French, Lunar and Planetary Institute


Influenza Epidemics 20th Century

Year Name Geographical Spread

Impact

1918 – 20 Spanish Flu

Originated in USA, spread to Europe

Estimated 40 million deaths (675,000 USA)

1957 – 58 Asian Flu Originated in Singapore, Hongkong, spread to USA, Europe

Estimated 1-2 million deaths (70,000 in USA)

1968 – 72 Hong Kong Flu

Originated in Hong Kong, spread to US, Europe

Estimated 1 million deaths (34,000 in USA)


More recent outbreaks

Year Name Geographical Spread

Impact

1976 Swine Flu (H1N1)

USA

Several hundered cases, 1 death

1997 Chicken Flu (H5N2)

Hong Kong 18 Cases 6 deaths

1999 H9N2 Hong Kong 2 cases, no deaths

Other major infectious diseases

Tuberculosis

Smallpox and threat of biological weapons

Newly emerging diseases - SARS

Other diseases - CJD, Plague, West Nile virus and other water borne / vector borne diseases (like Malaria)

Mortality Risk Transfer

In December 2003, Swiss Re sponsored a $400 million securitization of mortality risk

The purpose was to get protection against extreme mortality events, without relying upon the credit-worthiness of a retrocessionaire

A catastrophe bond structure was used, with loss measurement based on a parametric index

Expected Deaths

Acceptable Variance

Losses[% of expected]

Desired Risk Transfer

[100+Y]%

LIFE INSURANCE PORTFOLIO

Mortality Risk Transfer - Issuer’s Risk Position

100%

[100+X]%

The Issuer’s internal risk assessment is based on its aggregate portfolio

Mortality Risk Transfer - Structure

Insurer

FinancialContract

Premium

Up to Original Principal Amount at Redemption

Principal At-Risk Variable

Rate Notes

Total Return Swap

Counterparty

SPV

CollateralAccount

Investment Income

LIBOR - [ ]

Original Principal Amount

Interest: LIBOR + [ ]%

(1)(2)

(3)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

100 100+X 100+Y

Index Results (% of Base Index Value)

% R

educ

tion

in P

rinci

pal

Mortality Risk Transfer - Payout

Attachment Point: [100+x]%

Exhaustion Point: [100 + y ]%

Mortality Risk Transfer - Trigger Definition

The index value for a given year is defined to be the average death rate per 100,000 for pre-defined coverage area

The average death rate is calculated using a parametric index formula, which applies pre-determined weights to gender, age, and country, and draws on publicly-available mortality data as the inputs:

Attachment Point = x% of Index Value in baseline year

Exhaustion Point = y% of Index Value in baseline year

% Loss = 100 x (Index Value - Attachment Point) / (Exhaust Point - Attachment Point)

1i

,,1

)( fjii

fmjii

m

jj qagqagcIndex =

Wherecj is the weight for country j,gm,f is the gender weighting,ai is the weight for age band i, andqi,j is the observed death per 100,000 for males and females, respectively, from country j and age band i

Historical Analysis

Historical Index

200

400

600

800

1,000

1,2001,400

1,600

1,8002,000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000Year

Death

s per

100,0

00

W W

II 19

40-1

945

AIDS

1990

-199

5

W W

I 191

4-19

18Infl

uenz

a 191

8

Influe

nza 1

957

Influe

nza 1

968

Modeling Approaches

Perspective:– interest is in acute events– near term (1-3 years)

Theoretical Epidemiologic Models for Influenza/Infectious Disease

Theoretical Epidemiologic Models

Theoretical models are useful for understanding how certain factors can influence the incidence and severity of an influenza epidemic/pandemic

SEIR Model– Susceptible– Incubating– Infected– Recovered

Good in theory

Viral Virulence

Incidence of infection

Immunity representation

Public health, Surveillance

Population size, density

Air travel

Response

Useful for constructing various theoretical severity distributions using stochastic modeling

Age Standardized Mortality

US Insured Age Standardized Mortality

0

500

1000

1500

2000

Dea

ths

Per 1

00,0

00

Epidemiologic Transition

Changes in the relative importance of causes of death – Orman’s three-stage theory:

– Famine and Pestilence, prior to 19th century– Infectious diseases and pandemics , middle

of 20th century– Chronic diseases (cardiovascular, cancer)

Fourth stage? death due to longer-term degenerative diseases (Olshansky & Ault (1983), Rogers & Hackenburg ( 1987)

US Age Standardized Mortality

Period Average annual rate of Change in Index

Standard deviation of rate of change in Index

1901-1925 -0.44% 12.2%

1926-1950 -1.64% 3.4%

1950-1975 -0.88% 2.0%

1976-2000 -1.34% 1.5%

Future Value of Index

Approach 1– Index(t)=Index(t-1)*(1+annual change)– annual change is the RV– RV is not normal 1918 is more than 6

standard deviations– fatter tail distribution more appropriate– however returns are correlated: large

increase followed by large decrease (reversion to mean)

Annual Change in Mortality

Annual Changes in Mortality

0.0%10.0%20.0%30.0%40.0%

-0.36 -0.16 0.04 0.24 0.44 0.64 0.84% Change

Freq

uecy

Approach 2

Index(t)=Index(0)(1-Imp)^t*(1+EM)– EM is extreme mortality distribution

Age Standardized Pandemic Mortality

Pandemic Percentage Change in Index

Excess Mortality

Per 1000

1918-20 43% 5.54

1957-58 2.2% 0.14

1968-72 2.8% 0.18

Excess Mortality

Influenza Epidemics 20th Century

Year Name GeographicalSpread

Impact

1918 – 20 Spanish Flu Originated inUSA, spreadto Europe

Estimated 40million deaths

1957 – 58 Asian Flu Originated inSingapore,Hongkong,spread toUSA, Europe

Estimated 1-2million deaths(70,000 inUSA)

1968 – 72 Hong KongFlu

Originated inHong Kong,spread to US,Europe

Estimated 1million deaths(34,000 inUSA)

Influenza - Excess mortality (US Experience)

Excess mortality from pneumonia and influenza during 20th century pandemics

-800-600-400-200

0200400600800

10001200

0 10 20 30 40 50 60 70 80 90

Age

Exce

ss m

orta

lity

per

100,

000

popu

latio

n (1

918)

-20020406080100120140160

Exce

ss m

orta

lity

per

100,

000

popu

latio

n (1

957

& 1

968)

1918 A(H1N1)

1957 A(H2N2)

1968 A(H3N2)

Source: Glezen: Emerging infections: Pandemic influenza, 1996

Infectious diseases mostly affects the young and the elderly

Proportion of deaths due to infectious diseases

0%5%

10%15%20%25%30%35%40%45%

<1 1 to 4 5 to14

15-24

25-34

35-44

45-54

55-64

65-74

75-84

85+

% o

f tot

al d

eath

s

UK (2000) Netherlands (2000) US (1998)

Sources: Office of National Statistics (UK); Centraal Bureau voor Statistiek(Netherlands), Center for Disease Control (US).

Frequency of Pandemics since 1800

Years Virus Subtype Origin

1830-1833 Unknown Russia

1836-1837 Unknown Russia suspected

1889-90 H2 Russia

1889-1900 H3 Unknown

1918-20 H1N1 USA

1957-58 H2N2 China

1968 H3N2 China

source: Gust et al. (2001)

Frequency Model

Time between pandemics

Exponential mean of about 30 years

Or is there a cycle?

CDC’s FluAid –Severity Model

Based on paper “Economic Impact of Pandemic Influenza in the United States: Priorities for Intervention”, Meltzer, et all, 1999

Non-epidemiologic model used to estimate excess deaths, hospitalizations and resulting economic impact under various vaccine based interventions for a potential pandemic in the USA.

Applied FluAid model to Canadian individual inforce

FluAid

Key Assumptions

Population('000 in force)

0-18 19-64 65+ Total% of

Total

Non-high risk 90,207 1,157,048 24,025 1,271,280 97.8%

High risk 271 20,009 8,440 28,720 2.2%

Totals 90,478 1,177,057 32,465 1,300,000 100.0%

FluAid

At-risk groups assumed to be lives in ultimate period of mortality table and a fraction of substandard lives in the select period

Excess Mortality (default values)

FluAid Results

DEATHS ('000s FACE AMOUNT)

Attack Rates15% 25% 35%

0-18 Most Likely 1 2 2min 1 1 1max 5 8 11

19-64 Most Likely 91 152 213min 39 64 90max 143 238 333

65+ Most Likely 41 68 95min 38 63 88max 48 80 111

TOTAL Most Likely 133 222 310min 78 128 179

max 196 326 455

FluAid Model Relative to MCCSR Mortality Recommendation

CIA Capital and Risk Subcommittee– proposed required capital formula includes

catastrophe component – 10% of expected claims

Consistent with 25% attack rate most likely estimate from FluAid application.

Plagues of the 21 st Century Emile Elefteriadis, FCIA, FSA Swiss Re Life & Health Canada November...

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