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Strategic pandemic stress scenario tests: Not just for health insurers

Insurance Consulting and Technology|Reinsurance
COVID 19 Coronavirus

By Reid Kinney and Dave Ingram | September 18, 2019

We discuss the applicability of pandemic stress tests beyond health insurers and provide an example of what such a test could look like.

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About our ‘A Year in the Life of the Strategic CRO’ series

In our ongoing A Year in the Life of the Strategic CRO series, risk experts from our Insurance Consulting and Technology team, Willis Re and other parts of Willis Towers Watson cover how a strategically focused CRO can drive corporate strategy through the enterprise risk management planning process and throughout the year.

Stress scenario tests can be used to help quantify difficult-to-measure risks and to communicate risk positions to a variety of audiences, including boards of directors and rating agencies. Naturally, health insurers typically perform pandemic stress tests. But a pandemic stress scenario test might also be in order for most insurers and, in fact, most businesses.

For health insurers, a pandemic scenario is a common realistic disaster scenario. Pandemics are rare, but they do happen. By performing a pandemic stress test, a health insurer can become more aware of its vulnerability and perhaps decide whether to make specific preparations.

What is a pandemic?

An epidemic is an infectious disease affecting a disproportionately large number of people within a specific population or community. Broadly speaking, a pandemic is a less-localized, more global version of an epidemic.

A pandemic would result in extreme strain on many parts of the healthcare sector, including health insurers. With a pandemic, there could be significant adverse health and mortality effects, an overall economic slowdown, reduced consumer confidence and spending and an increase in deaths and life insurance claims. The healthcare system could be strained and potentially have demand for services that exceed capacity.

The impact on health insurers could include increased utilization resulting in a loss ratio spike as well as operational issues regarding processing the increased number of claims. Employee absenteeism of both sick and well people would impact workplace productivity.

A realistic disaster pandemic scenario

Stress scenarios can be defined to have a broad range of potential adverse impacts. We find that the most useful scenarios fall within the range of “normal volatility” and “realistic disasters.” Normal volatility means that you would expect them to happen once every five years. Realistic disasters are so unlikely and adverse that you would not expect them to happen more than once in your career.

When we look back at the experience that we have had with pandemics, we find that there have been four influenza pandemics over the past 100 years. To create a “realistic disaster” scenario, we will imagine a pandemic that is not as severe as the infamous 1918 Spanish Flu but that is worse than the second-worst pandemic that occurred in 1957.

Detailed description of a pandemic scenario

In the year 2021, a new strain of avian influenza develops in Hong Kong. There is some local immunity – perhaps from due to similarities between the strain and the Avian Flu of 1957-1958. With modern mobility and transportation, this quickly spreads throughout the world, especially Europe and the Americas – in year one of the outbreak. It tapers off in year two.

While the 1958 flu led to one million deaths worldwide and the 1918 flu led to 50 million deaths worldwide, the hygiene, sanitation, pharmaceutical (antivirals, antibiotics) revolution of past 75 years makes the repeat of something as severe as the 1918 unlikely.

This particular event turned out to be more severe than 1957 and far less severe than 1918. It results in seven million deaths worldwide, 800,000 of which are in the United States, concentrated in large metropolitan areas. Additionally, there are nine million hospitalizations in the U.S., 39 million additional physician office visits and 150 million additional sick days taken.

It took until late in the second year of the pandemic to develop a vaccine that was effective for this strain and to manufacture enough to have an impact.

Impact on regional expansion strategy

The company divides the U.S. into six regions and a major strategic initiative targets significantly increasing both representation by distributors and sales in the region that currently has the lowest sales. Plans for this initiative are focused on a 90-day push to engage 200 new distributors and provide them training and sales materials for the company’s products.

The impact of an influenza pandemic on this strategy at worst would be two to four weeks of lost time due to illness of our representatives and of prospective distributors. Best results would be obtained by stretching the timeline for the project to 120 days and reducing the projected sales increase for the region by 15% for this calendar year.

Impact on strategies

With the detailed scenario description in hand, the usual process for a stress test is to evaluate the purely financial impact, i.e. the changes in premiums, claims, expenses, reserves and capital.

For a more strategic analysis of the impact of a pandemic, the CRO will want to also look at the pandemic’s effect on current and potential customers, distributors and company staff, not only in terms of their health and ability to go about their normal affairs, but also in terms of their attitude and willingness to behave in a more or less normal manner.

In some cases, the potential impact upon company operational staff is the key issue. One company’s response to a strategic analysis of that potential impact was to significantly improve their capabilities to support working from home and to carefully look at their workflows to identify key people whose illness might cause problems and initiate additional cross training.

Role of the CRO

Though the CRO does not need to be solely responsible for the strategic analysis, it might be best for the CRO to provide an initial example to show business leaders what the process looks like and what kinds of outcomes to expect. Feel free to adapt this pandemic stress scenario to your business.

Previously in the A Year in the Life of the Strategic CRO series: 3 factors that make silent cyber risk so challenging for CROs.


Reid Kinney
Vice President and Consulting Actuary, Willis Re’s Life Accident and Health practice

Head of Willis Re ERM Advisory

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