Neck and neck

The racing fraternity is celebrating the return of Royal Ascot to its Berkshire home this June but, for the bloodstock insurance market, one potential threat overshadows the proceedings - avian flu.

Nick Mills, senior partner at Cinque Ports Veterinary Associates, a practice covering Kent and East Sussex, has been studying avian flu since the 1970s and is involved with the bloodstock insurance market. He says: "Avian flu isn't a huge threat to the bloodstock market but it is a potential risk that needs to be managed."

So far, outbreaks of avian flu have been restricted to birds in the UK but the virus has the potential to be passed to other species if there is close contact or if infected meat is eaten.

As well as cases where humans have contracted the virus, for example, there have been several cases of domestic cats dying after becoming infected with the H5N1 strain of the virus. The first of these was in Thailand in 2004, where 14 out of 15 cats in a household died after one of them ate an infected chicken carcass. Other cases of cats dying from the virus have been recorded in Indonesia and Iraq and, in March, a cat was found dead in Germany after an outbreak of the virus among wild birds.

Although the ability for the current strain of the virus to pass to other species is fairly limited, there is the risk that the virus may mutate so that it can be easily spread. This happened in 1989 when a different strain of the avian flu virus spread among horses in north-east China.

When that happened, the strain had a mortality rate of 20%. That said, when it returned the following year, the mortality rate was much lower, despite almost half of the horses contracting the virus. "This suggests that horses can develop immunity to the virus," adds Mr Mills.

Putting such encouraging signs aside, the bloodstock insurance industry is not taking any chances. Julian Lloyd, bloodstock underwriter at Hiscox and chairman of the Lloyd's Market Association bloodstock committee, explains: "I've been in bloodstock underwriting for more than 30 years, and this is the first time that it's been termed a catastrophe exposed class. At the beginning of the year, we excluded losses due to avian flu on our all-risks book so it will be clear of avian flu by the end of the year."

He adds that although there are steps that can be taken to prevent horses from contracting the virus - for example, keeping horses inside and away from birds - it is currently impossible to model for the risk. This is because a large proportion of the bloodstock market is mobile. For instance, racehorses and broodmares can travel internationally as well as within continents, making it difficult to know where an insured animal is located. "We don't know where the horses are at any given time so we wouldn't be able to measure the risk accurately," explains Mr Lloyd. "If there was an outbreak in one area we wouldn't know whether we had a significant exposure or not."

Other Lloyd's bloodstock underwriters have also excluded avian flu, and policy wordings state that cover is not for the "death or humane destruction directly or indirectly caused by, happening through, in consequence of or contributed to by avian influenza or any mutant variation thereof".

Devastating impact

David Howard, chief executive officer of Howard Global Insurance Brokers, comments: "The underwriters got onto this quickly - it's an aggregation of risk issue. Bloodstock is such a small market with a fairly limited capacity that an outbreak of avian flu and the resultant claims could finish us off."

Although the reaction has been prompt, others may feel it has been a little too quick. Some players in the market, notably the US domestic players, have not yet introduced avian flu exclusions.

Robert Heinzl, bloodstock and livestock insurance broker at Heath Lambert, explains: "It is a concern, as we could lose business. However, we've found that relationships with clients in this market are strong and they understand why the exclusion has been introduced, so it hasn't affected us."

Once the risk is better understood, cover for avian flu may be possible again. "At the moment, it's about managing exposure," says Mr Lloyd. "Once the risk is fully understood we will be able to offer some cover again, although this may be more limited."

The development of a vaccine may also enable bloodstock underwriters to reverse their decision. This was the case for the West Nile Virus when it was diagnosed among horses in the US in 1999 and 2000. Initially, underwriters slapped an exclusion on the disease but when an effective vaccination was developed this was relaxed.

Philip Needham, portfolio manager for bloodstock and equine at QBE European Operations, says: "West Nile Virus is excluded in the US unless you have up-to-date inoculations but there are no inoculations for avian flu to date."

Similar to West Nile Virus, many diseases that have caused high mortality in the past can be managed (see box), although other factors will often come into play when determining the better risks. "From an underwriting perspective, it certainly pays to be in certain areas of the world and at value levels where the owners are prepared to invest in good vets and disease management," comments Mr Lloyd. "Providing you have these in place, treatable diseases such as colic and rhodococcus aren't really an issue."

Event cancellation

While the mortality risk to horses from avian flu is likely to be small - but significant and unknown enough to warrant at least temporary exclusion - economic loss is likely to be the main concern for the bloodstock market. "I see avian flu as a potential threat to cancellation of events and restriction of movement rather than a mortality issue," says Mr Needham.

Indeed, if avian flu develops into a pandemic it is probable that movement restrictions will be enforced in some shape or form. This could prevent horses from being transported, whether for racing or breeding purposes. "If restrictions are imposed on movement, this will mean we could see claims for loss of stallion income," adds Mr Howard.

Additionally, governments may take steps to curb large public gatherings, given the way that the virus spreads, meaning race meetings could be cancelled altogether. The extent of the problem could be larger than with other cancellation risks too.

For example, while adverse weather or terrorism tends to hit relatively small areas, an avian flu pandemic would affect much of the world, creating huge potential losses. In reaction to this concern, there has been an increase in demand for stand-alone policies covering economic loss.

"Demand is growing," says Mr Heinzl, who offers it on bloodstock and livestock. "There are capacity issues, so cover tends to be selective and restricted. For instance, you would have to buy it alongside mortality cover and often the cost is a deterrent."

Such reluctance to buy cover is fairly typical with this type of risk, according to Mr Lloyd. He says that, generally speaking, owners will delay taking out this cover until the threat becomes more likely, sometimes waiting until it happens. "They then wonder why the price hasn't stayed the same," he says.

Contract certainty

As well as managing the risk of avian flu, the bloodstock insurance market is also getting to grips with contract certainty requirements. This has meant significant rewriting of policy wordings to ensure that there is no misunderstanding about cover.

One example is the requirement for a horse to be fit and healthy and subject to a veterinary certificate before cover can be written. "This isn't contract certainty," says Mr Lloyd. "To address this, we state that if there is any doubt about the health and fitness of the horse, and the owner has submitted a vet's certificate, then the onus is on us to prove it wasn't fit and healthy when the policy started. However, if there is no vet's certificate, the onus is on the owner to prove it was fit and healthy."

The amount of work involved with this rewriting exercise is considerable but it is expected that it will remove a large amount of uncertainty, which can arise at the point of claim. "Wordings are getting tougher and policyholders will receive much more paperwork but having one set of wordings is a good idea," says Mr Howard.

As this is a global market, he particularly appreciates the fact that the new wordings will be adopted internationally. "Being able to refer to one set of wordings, amended in line with local legislation, will benefit the market," he concludes.

DISEASE OUTBREAKS

Avian flu may have ruffled a few feathers in the bloodstock insurance market but it is not the first disease to pose a threat.

West Nile Virus

West Nile Virus is a disease that is carried by mosquitoes and can affect humans, horses and birds. Symptoms are flu-like but, in severe cases, may cause encephalitis and death. In 1999, a total of 20 cases of West Nile Virus were detected in horses on Long Island in the US with a further five probable cases also recorded - four of the horses died. The following year, 23 equine cases were diagnosed. Although the virus can only be spread by infected mosquitoes, this high incidence of the virus resulted in insurers introducing an exclusion for it on their bloodstock policies. This remained in place until an effective vaccine was developed. There are currently two different vaccines that can be used, both of which are followed up with periodic booster injections. Insurers will only bring in this exclusion for horses that have not been vaccinated based in or travelling to the US.

Rhodococcus equi disease

Rhodococcus equi disease is a bacterial respiratory infection that affects horses, especially where large numbers are kept together. It usually affects foals aged four to 12 weeks, rather than older horses. Symptoms include coughing, wheezing, a fever, abscesses and crackling sounds in the lungs. It can be treated but once a horse has been diagnosed it is important that the condition is managed with ultrasound scans and regular check-ups so that symptoms can be controlled. This can present problems when horses are sold and the new owners do not continue to manage the condition. Where this occurs, insurers might step in to ensure disease management is in place.

African horse sickness

African horse sickness is an infectious disease spread by insects that affects horses, mules and donkeys. It is endemic in sub-Saharan Africa but has spread as far north as Spain, Morocco and the Middle East. The severity of the disease ranges from a fever that lasts for three to eight days to either a pulmonary form that has a 95% mortality rate or a cardiac form with a mortality rate of around 60%. As it is not spread between horses, risk can be managed by excluding cover for horses in areas, or travelling to areas, where there are insects carrying the infection. Additionally, any horse being imported from such an area can be tested for the disease before cover is offered.