It was never about if, just when

It was never about if, just when

Warnings of an imminent pandemic were left on the shelf, resulting in the biggest public health crisis to confront the world

By Bernice Han

Months of life-changing lockdowns have not suppressed the coronavirus. Second and third waves of the pandemic emerged as restrictions were eased, with the exception of New Zealand, Iceland and a handful of other countries.

As laboratories race to find a vaccine, several post-mortems into the worst public health emergency to unfold this century are underway. Predictably there will be many pressing questions but few ready answers.

On one aspect, however, there is near universal agreement: the world finally ran out of luck after years of skating on thin ice.

For years the medical community has been sounding alarms about the risks of a new super-virus spreading rapidly around this interconnected planet. So has the insurance industry, led by the likes of Swiss Re, which had been looking at the risk for many years, assessing the probable threats infectious diseases would pose.

“Pandemics have been part of the risk models of reinsurers and insurers for 20 years,” Bernd Wilke, Zurich-based Senior Risk Manager with Swiss Re, tells Insurance News. “As reinsurers, we know that a pandemic is a major risk for which we must always be prepared.”

Swiss Re had warned in its first Sonar report in 2013 of the potential dangers of emerging infectious diseases.

The reinsurer returned to the subject two years later, detailing how a global pandemic could affect global supply chains and rattle financial markets.

“We went back to the theme again, in 2017,” Swiss Re says in a Sonar report in June. “We said the question isn’t whether another deadly infectious disease will appear, but when and how well society is prepared to cope with it. Impact potential is high.

“As our Sonar reports to date testify, the warning signs were there. The reach and depth of impact – on economies, financial markets and societies – from the containment measures imposed to halt spread of the virus were probably underestimated.”

Technology billionaire and philanthropist Bill Gates joined the cause in 2015, warning an infectious virus posed a greater threat to humanity than a nuclear war. A year earlier, then United States President Barack Obama had ominously predicted a pandemic would likely strike in as little as five years.

“In order for us to deal with that effectively, we have to put in place an infrastructure – not just here at home, but globally – that allows us to see it quickly, isolate it quickly, respond to it quickly,” Mr Obama said five years ago.

“It is a smart investment for us to make. It’s not just insurance… It is knowing that down the road we’re going to continue to have problems like this, particularly in a globalised world where you move from one side of the world to the other in a day.”

While no one could have foreseen the chaos and death that would strike when COVID-19 hit the US, he was close to the mark in understanding the possible impacts.

When the World Health Organisation (WHO) finally declared the virus outbreak a pandemic on March 11, it didn’t shocked Michael Toole, an epidemiologist at the not-for-profit Burnet Institute medical research body in Melbourne.

He knew this day would come. It was not a matter of if, but when.

“This has been predicted for many years,” Professor Toole told Insurance News. “Of course, I wasn’t expecting this particular virus, but yes, I was expecting a pandemic.

“Many experts predicted that this could happen and asked governments to prepare for it, but there was just not the investment.”

In a comment that parallels the insurance industry’s call for large-scale mitigation projects to prevent catastrophes in climate change-exposed regions, Professor Toole says: “Prevention is better than cure, but there’s very little investment in prevention.

“All this money we are spending now in response could have been saved if we were better prepared. And I mean the world, not just Australia.”

For example, the last time Australia tested its pandemic response plan was in 2008 – 12 years ago. The Severe Acute Respiratory Syndrome epidemic that mainly affected the East Asian region in 2002-2004 jolted many countries into drawing up contingency plans, but fears of public health emergencies gradually eased, despite signals that the world at large remained in a danger zone.

The Middle East Respiratory Syndrome that first surfaced in Saudi Arabia in 2012, Ebola in Central Africa in 2014 and the mosquito-borne Zika virus epidemic in 2015 were all serious outbreaks. But because they were contained within geographical areas and did not lead to a total shutdown in global commerce, initial concerns inevitably gave way to complacency.

The WHO declaration in March came more than three months after a mysterious virus emerged in the Chinese city of Wuhan and spread like wildfire, sending cities and countries into forced lockdowns.

It’s the first time that a pandemic has been sparked by a coronavirus – a pathogen that is named after the crown surrounding each virus particle. In Latin, corona means “halo” or “crown”.

Taming the SARS-CoV-2 virus, which causes the COVID-19 disease, has proved elusive. So have the efforts to develop a vaccine, despite massive investments and significant advances in research. By August the number of confirmed cases had risen to more than 19 million globally, including more than 712,000 deaths, according to Johns Hopkins University in the US.

Warning signs: Insurance News outlined the threat in 2016

Many have compared the current situation to the 1918 Spanish flu pandemic, where an estimated 500 million people, or one-third of the world’s population at that time, were infected. At least 50 million people died, making it the deadliest pandemic of the 20th century.

Top US infectious disease expert Anthony Fauci says the world is now “living through a historic pandemic outbreak” and he doesn’t think the nightmare will go away soon.

“We are certainly not at the end of the game. I’m not even sure we’re halfway through,” said Professor Fauci, who is Director of the US National Institute of Allergy and Infectious Diseases.

In places where suppression measures appeared to have initially worked the virus has struck again with a vengeance when lockdowns were lifted, forcing the re-introduction of containment measures. In Australia, Victoria is struggling to quell a series of fatal outbreaks while in the region, South Korea and Hong Kong are seeing new outbreaks after initial success with containing the first surge of infections.

Repeated failures to pay heed to the warnings of a pandemic risk have proved extremely costly. Since March, governments have been forced to pump in hundreds of billions of dollars in financial aid to avert an economic collapse. More fiscal support could be on the cards if Dr Fauci’s belief there is still a long way to go before the virus runs its course is accurate.

It remains to be seen if pandemic risks will be taken more seriously after the world overcomes COVID-19. If history is any indication, it appears the cycle will recur over and over again.

“We are going to forget about this and move on,” Harry Rosenthal, a retired risk professional and academic, told Insurance News. “I could be wrong, but I think it will fade from memories again.

“It’s a human behaviour thing,” he says. “There is an idea that humans have a mastery over nature. You can build a house in a swamp, you can build near a river, you can build in a bushfire area and you’re going to take your chances.”

Insurance News interviewed Mr Rosenthal about the pandemic threat in 2016, when he was the general manager risk management services at mutual insurer Regis. He said then that it was “drawing a long bow” to describe pandemics as an “emerging” issue.

No matter what critics or doubters say, being well prepared holds the keys to handling a pandemic effectively. Lost among the chaotic state of affairs has been the stellar example of Taiwan.

The island nation has been hailed as a role model for its handling of the outbreak. Authorities acted swiftly, screening arrivals from Wuhan as soon as reports of the infections in the Chinese city emerged. It also moved quickly to co-ordinate testing and tracing of suspect cases as part of its pandemic response plan.

“Taiwan was ready on day one,” the Burnet Institute’s Professor Toole says. “As soon as they heard about the Wuhan outbreak they had a plan ready and they rolled it out.”

He says when a future pandemic strikes, the work to contain and eliminate it must be a united global effort, led by the WHO.

“Decisions need to be based on science, and the countries that have based their policies on science have done very well,” Professor Toole says. “I’m hoping the world will give the WHO the resources to develop a plan that is a global plan.”

Insurers’ mistake becomes a high-stakes game

When it emerged that standard business policies contained communicable diseases exclusions, pandemics included, the outcry from all sides was predictable: blame the insurers.

That’s hardly a phenomenon. Bashing the industry has been the go-to playbook for critics. Can’t afford directors’ and officers’ premiums? Can’t get professional indemnity cover for a building surveyor that includes cladding protection? Don’t blame the factors that caused the problems, like funder-driven class actions or dodgy building practices; blame the insurers.

But now insurers, among the most cautious and legalistic of businesses, are playing a high-stakes poker game as they seek to sort out a mess of their own making that could conceivably end in them paying claims for a risk they never intended to cover and were never paid to include.

Some Australian insurers used outdated policy wordings referring to the now-repealed Quarantine Act 1908 which was replaced by the Biosecurity Act 2015.

Now a court case will decide if they are exposed to claims for losses that were never insured for in the first place – and therefore weren’t included in calculations of reserves and reinsurance.

Insurers, by default, do not provide cover for a pandemic risk, unless it has been specifically requested and paid for, as was the case with the All England Lawn Tennis Club.

Not every business has pockets as deep as the organiser of the Wimbledon Championships grand slam tennis tournament. The club paid a total of $US34 million in premiums for the past 17 years, and will get about $US141 million after COVID-19 forced the cancellation of this year’s tournament.

The hundreds of billions in fiscal debt that governments globally have taken on to hold up their economies and save jobs offer perhaps the best indicator of the cost of providing pandemic coverage.

As Rade Musulin, a principal with actuarial consultancy Finity, puts it: “Pandemics fail a lot of tests for what is insurable.”

“To start with, it’s difficult to define the event as they happen over a long time, not like a cyclone which makes landfall on a specific date,” he told Insurance News. “The magnitude of the losses is huge, beyond the capacity of the insurance system.

“Losses are global and correlated with economic shocks, so it’s hard to diversify risk. And modelling is difficult. If you can’t measure the risk, it’s difficult to insure it.”

It’s an assessment shared by Swiss Re. Bernd Wilke, its Zurich-based Senior Risk Manager, says pandemics are not insurable from a private sector perspective.

“By definition, a pandemic occurs worldwide and at the same time, which makes geographical and temporal diversification impossible. In actuarial terms, this would correspond to annual risk premiums that would probably be unaffordable for the insured.”

There’s a growing sense of concern as the industry prepares to defend its position in a test case being mounted by the Insurance Council of Australia and the Australian Financial Complaints Authority that will be filed in “a superior court”.

The industry says the intent of the pandemic exclusions are clear, even if many of the business interruption policies held by businesses make no mention of the Biosecurity Act which replaced the Quarantine Act.

How the court will rule is, at best, a guessing game. For the industry, the stakes have possibly never been so high.