The life market would bear the brunt of losses from an avian flu pandemic, says Lauren Kalinowski.

Life insurers and their reinsurers are most likely to be hardest hit by a bird flu pandemic due to their mortality risk exposure. The effect from the increase in claims across Europe and the US could amount to as much as $53bn for the life insurance and reinsurance industry. Mainstream non-life insurance policies do not tend to offer coverage for flu pandemics.

One hundred and nine people worldwide have lost their lives to bird flu as of 6 April 2006, according to the World Health Organization, yet there is still no evidence the virus has mutated to enable human-to-human transmission. Without this mutation, the global economic and human effect is likely to remain limited.

However, given expert opinions that this mutation is a distinct possibility, it is appropriate to assess the likely impact on Fitch's insurer ratings should a pandemic develop. Although impossible to predict with accuracy, Fitch has estimated, using various expert opinions, 400,000 deaths could occur in Europe and 209,000 in the US.

Under these assumptions, the effect from the increase in claims could amount to as much as $53bn. It is difficult to assess how much of the risk and associated costs would be passed on to life reinsurers, but it is likely to be substantial. Nonetheless, the increase in claims in such a scenario would be tolerable for the life insurance industry in aggregate, although some players would likely be more affected than others.

Life insurers, non-life insurers and reinsurers would all be affected by any falls in the investment market and business interruption that could accompany a flu outbreak. Although this could be significant, if the outbreak is relatively short lived, the overall effect is likely to be temporary. Consequently, Fitch does not envisage a significant threat of widespread rating downgrades to either the life, non-life or reinsurance sector at present.

Downgrades would be most likely if the virus mutates to allow human-to-human transmission and leads to a considerable increase in mortality claims or investment market losses. The insurers most affected would be those with high concentrations of mortality risk.