Will Swine Flu Infect Weakened U.S. Insurers?

The World Health Organization now says that swine flu is a public health emergency with the “potential to cause a pandemic,” so insurance company CEOs should be spending the week trying to answer these questions: “How bad could it get?” and “How will it affect our company?”

For health insurers, the risk is more costs, more people taking medication and more people in hospitals.

For property casualty insurers, “business interruption” insurance could take a big hit. In Mexico, where nearly 70 have already died, the outbreak has shut down schools, theaters and virtually every form of public commerce. People who do venture out wear masks to protect themselves.

For life insurers, an epidemic has the potential to be even more serious. Insurers rely on the expectation that only a certain number of people are going to die in any given year, and those people will generally be older with limited insurance or policies that have already been paid for.

But this disease, like the infamous “Spanish flu” of 1917, apparently targets the young and healthy, people who are likely to have low-cost but high-value policies that companies don’t expect to have to pay off. In Queens, New York, the flu has already infected 100 high school students.

In this country, remedies such as Tamiflu seem to be effective. But the genetic code of this flu allows it to migrate between birds, swine and humans, giving it a life of its own and a chance to develop immunities to current vaccines. Also, flu season normally ends in the spring, and this one is just beginning.

A study by economist Steve Weisbart of the Insurance Information Institute from 2006 provides a reference point. A “moderate” influenza pandemic, such as the ones that the U.S. had in 1957 and 1968, could cost life insurers an estimated $31 billion more in additional death claims. A “severe” pandemic, like the 1917 outbreak, would cost insurers $133 billion.

This may both help and hurt life insurers. The ailing stock market has cut their investment portfolios by a third to a half, limiting their ability to make payouts. On the other hand, insurance companies like Prudential have been lining up outside the U.S. Treasury Department asking for TARP funds to shore up their finances. This could make their case even stronger.

What about acquisitions? If there’s even a hint that a world-wide “pandemic” could occur, many of the likely overseas bidders for units of American International Group and Hartford Financial that are now up for sale may reconsider, or at least take a wait-and-see attitude until the swine flu scare subsides or ends.