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Life insurers have good reason to be alarmed by the prospect of an influenza pandemic.

While just about every sector of the economy would experience a loss of sales and financial hardship in a pandemic, life insurers would be especially hard hit.

Even a moderate influenza pandemic similar to the 1957 and 1968 outbreaks could cost U.S. life insurers $31 billion in additional claims, according to the Insurance Information Institute. A severe pandemic similar to the one in 1918 could cost up to $133 billion, according to the III.

Although some life insurers are financially strong with conservative balance sheets, others are weaker. Weaker companies could struggle in the event of a pandemic, even if the industry as a whole had adequate resources, says Steven Weisbart, an economist with the III and author of the report "Pandemic: Can the Life Insurance Industry Survive the Avian Flu?"

The weakest companies probably would not survive a severe pandemic, he says, but these are generally small companies with relatively few people insured. For life insurers, the flu is not usually a serious concern. In a typical year, the seasonal flu kills about 36,000 Americans. It tends to target those with the weakest immune systems, the very young or the very old.

But the H5N1 virus that is spreading through the world's bird population is different. In the few human cases that have emerged so far, it has been extraordinarily lethal and has been targeting people under 40.

Human cases of the H5N1 virus are still relatively rare, and it does not yet spread easily from person to person. Many people who contracted the avian flu got it because of close contact with infected birds.

But experts worry that the H5N1 virus will mutate and become efficient at spreading among people, and that could trigger a pandemic that kills millions.

In the next influenza pandemic, some experts estimate that more than 20 percent of the world's population would become infected. A lot of people would be home sick with the flu or taking care of sick family members and employee. Absentee rates would soar.

Although that would create a lot of operational issues for businesses, that's not what has AIG's Thomas worried. "I'm a lot more worried if they don't come back," he says.

And the mortality rate of the people who come down with H5N1 is very troubling.

As of mid-March, about 184 people worldwide have been infected with H5N1 and 103 have been killed, according to the World Health Organization. That is a mortality rate of 55 percent, which is astonishingly high.

The 1918 Spanish flu had a mortality rate of 2.5 percent, which was high compared with previous influenza epidemics that had mortality rates of 0.1 percent.

Unlike the seasonal flu, the H5N1 virus seems to prey on people under 40. Of the people who have died from the avian flu so far, all but six of them were under the age of 40, according to a recent report in the Toronto Star. The median age was 19, and a quarter of them were under the age of 12.

That has health experts worried because that is what happened in 1918. Scientists have found that the 1918 influenza virus triggered something known as a cytokine storm, a deadly overreaction of the victim's immune system. The people with the strongest immune systems, therefore, were also among the most vulnerable to the disease.

An influenza virus that causes a cytokine storm would kill not just those with the weakest immune systems, but those with the strongest as well.

In the 1918 influenza pandemic, which killed roughly 675,000 people in the United States--and between 50 million and 100 million worldwide--the age group with the highest number of deaths was ages 25 to 34, a population that today has significant group and individual life insurance in force, according to the III report.

In a severe pandemic like the one in 1918, 1.9 million people in the United States could die, according to the Department of Health and Human Services.

By extrapolating from the recent H5N1 outbreaks, there could be 16 million deaths in a worst-case scenario, based on the assumption of 80 million Americans infected and a mortality rate of 20 percent, according to a report by Laurie Garrett in the July/August 2005 issue of Foreign Affairs.

Garrett's infection rate is about what was experienced in the U.S. 1918 flu pandemic, according to the III report.

Based on reasonable assumptions, the III says a severe influenza pandemic, modeled on the 1918 outbreak, might cause $133 billion in death claims over and above the usual payout. A moderate pandemic, modeled on the 1957 and 1968 outbreaks, might cause additional death claims of $31 billion industrywide.

In 2004, in terms of claims dollars, U.S. life insurers paid out $32.2 billion on individual policies, $18.7 billion in group life insurance claims and about $0.6 billion in credit life insurance claims, according to the III report.

The dollars paid to beneficiaries in normal years, however, grossly understate what would happen in a severe influenza pandemic, Weisbart says in the report.

This is because the average payment per policy in a typical recent year was about $12,000. This reflects the fact that many death claims are from whole life policies for people who are quite aged at death and issued many decades ago.

In a pandemic like the one in 1918, claims on individual policies would more likely be closer to the current average in-force amount, which was $80,400 in 2004.

Another indicator, he says, could be the current average amount issued in the most recent several years.

For term insurance, the issued amount is probably over $250,000; for some companies it is more than $500,000. Comparable numbers from permanent life insurance policies would be closer to $100,000, perhaps less, he says.

So if 1 million insureds died from the flu and if claims equaled only the average in-force amount per policy, life insurers would likely pay claims from individual life insurance policies totaling $80 billion.

That is more than twice what they pay in a year for all individual policies for all causes of death. Although the main risk for life insurance companies would be claims in excess of expected mortality, a serious secondary risk could be asset deterioration, Weisbart says.

In a pandemic, many companies could experience a decline in sales because people would be stuck at home, either sick, taking care of family or simply to try to avoid mixing too much with other people so as to lower the chances of contracting the disease themselves.

The loss of business and a likely decline in consumer confidence would cause corporate earnings to plunge and trigger defaults on corporate debt, Weisbart says.

Even though life insurers would suffer serious financial losses in an influenza pandemic, there could be some positive effects as well, he says.

Policy lapses and surrenders would likely decrease drastically as insureds make every effort to keep their life insurance in effect in case they become infected and die, he says.

After the first wave of the flu had passed, there would likely be a substantial increase in the number of people applying for new life insurance policies.

However, with their surplus funds down from paying influenza claims and with reinsurers raising rates dramatically, some insurers may be reluctant or financially unable to write many new policies.

Many publicly held insurers and reinsurers might find it necessary to raise additional capital from investors, he says.

PATRICIA VOWINKEL lives in New Jersey.

April 15, 2006

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