Cambridge Centre for Risk Studies Cambridge Risk Framework Human Pandemic: Stress Test Scenario SÃO PAULO VIRUS PANDEMIC SCENARIO Cambridge Centre for Risk Studies University of Cambridge Trumpington Street Cambridge, CB2 1AG United Kingdom [email protected] www.risk.jbs.cam.ac.uk Journal of Network Theory in Finance Risk Journals www.risk.net Air Traffic Network of the World Conduit for Pandemic Spread Infected passengers spread the pandemic from country to country. Colour coding shows the simulated spread of the São Paulo Virus Pandemic over time. Cambridge Centre for Risk Studies University of Cambridge Judge Business School Trumpington Street Cambridge, CB2 1AG United Kingdom [email protected] !http://www.risk.jbs.cam.ac.uk/ June 2014 The Cambridge Centre for Risk Studies acknowledges the generous support provided for this research by the following organisations: The views contained in this report are entirely those of the research team of the Cambridge Centre for Risk Studies, and do not imply any endorsement of these views !by the organisations supporting the research. This report describes a hypothetical scenario developed as a stress test for risk management purposes. It does not constitute a prediction. The Cambridge Centre for Risk Studies develops hypothetical scenarios for use in improving business resilience to shocks. These are contingency scenarios used for ‘what-if’ studies and do not constitute forecasts of what is likely to happen. Report citation: Coburn, A.W.; Bowman, G.; Caccioli, F.; Chang, M.; Kelly, S.; Ralph, D.; Ruffle, S.J.; 2014, Stress Test Scenario: São Paulo Virus Pandemic; Cambridge Risk Framework !series; Centre for Risk Studies, University of Cambridge. ! !Research Project Team Pandemic Project Lead Dr. Andrew Coburn, Director of External Advisory Board, Centre for Risk Studies and !SVP, RMS, Inc. Pandemic Subject Matter Editor !Mary Chang, Medical Research Analyst, RMS, Inc. Cambridge Centre for Risk Studies Research Team Professor Daniel Ralph, Academic Director Dr Michelle Tuveson, Executive Director Dr Andrew Coburn, Director of External Advisory Board Simon Ruffle, Director of Technology Research Dr Gary Bowman, Research Associate Dr Fabio Caccioli, Research Associate Dr Scott Kelly, Research Associate Dr Roxane Foulser-Piggott, Research Associate Dr Louise Pryor, Risk Researcher Dr Andrew Skelton, Risk Researcher Ben Leslie, Risk Researcher !Dr Duncan Needham, Risk Associate Consultants and Collaborators Oxford Economics Ltd., with particular thanks to Fabio Ortalani, Senior Economist Financial Networks Analytics Ltd., with particular thanks to Dr Kimmo Soramaki, Founder and CEO; and Dr Samantha Cook, Chief Scientist Cambridge Architectural Research Ltd., with particular thanks to Hannah Baker, Graduate Research Assistant Axco Ltd., with particular thanks to Tim Yeates, Business Development Director Dr Andrew Auty, Re: Liability (Oxford) Ltd. Antonios Pomonis, Independent Consultant Dr Gordon Woo, RMS, Inc. Dr Doug Crawford-Brown, Director of the Cambridge Centre for Climate Change ! Mitigation Research (4CMR) at the University of Cambridge ! Cambridge Centre for Risk Studies Website and Research Platform http://www.risk.jbs.cam.ac.uk/ Stress Test Scenario São Paulo Virus Pandemic Contents 1 Executive Summary...................................................................................................................... 2 2 Stress Test Scenarios.................................................................................................................... 5 3 Pandemic as an Emerging Risk ................................................................................................ 11 4 Defining the Scenario................................................................................................................. 15 5 The Scenario ................................................................................................................................ 18 6 Loss and Direct Impacts ............................................................................................................ 24 7 Macroeconomic Consequences................................................................................................. 29 8 Impact on Investment Portfolios ............................................................................................. 37 9 Managing the Risk...................................................................................................................... 42 10 Bibliography ................................................................................................................................ 46 Cambridge Centre for Risk Studies Stress Test Scenario São Paulo Virus Pandemic 1 Executive Summary Pandemic peril (S2); another alternative where the vaccine does not arrive in time (S3); and an extreme case Nature and mankind are engaged in a continual combining poor response failure and vaccine failure battle in which new pathogens emerge and are (X1). combatted by antibodies and medical treatments that develop in response. An extreme pandemic This is a stress test, not a prediction could, in every nation, overwhelm the healthcare system and inflict massive social and economic This report is one of a series of stress test scenarios damage. that have been developed by the Centre for Risk Studies to explore the management processes of We use a pandemic scenario to quantify the effects dealing with an extreme shock. It does not predict a of such a catastrophe. Scenarios more generally can catastrophe. be used to cover the spectrum of extreme shocks. A suite of scenarios is a basis for a global enterprise to A ‘1-in-100’ Event stress test itself and improve its resilience. The São Paolo Virus Pandemic is extremely unlikely São Paulo Virus Pandemic Scenario to occur. In fact we have chosen a severity of scenario that could only be expected to occur with a The São Paulo Virus Pandemic Scenario envisions a chance of 1-in-100 in any year. So there is a 99% fictional strain ‘H8N8’ of an influenza virus, which probability that a scenario of this severity will not is very infectious and moderately virulent. The occur next year. illness debilitates its victims for weeks, inflicting massive damage on society, though it is only fatal in The unfolding scenario a third of a percent of infected cases. The pandemic is curtailed when a vaccine becomes available. We outline the timing and stages of the São Paolo Virus Pandemic. We subsequently estimate direct The virus kills 19-25 million people worldwide, in losses, then global macroeconomic losses and different variants of the scenario. finally impacts on financial markets. The world loses between $7 trillion and $17 trillion of GDP over five years, almost as severe as the Picking on Brazil Global Financial Crisis of 2007-2012. In financial We arbitrarily simulate the outbreak starting in markets, equities are badly hit. A typical investment Brazil. Apart from having a large poultry industry, portfolio suffers negative returns. Long term bond Brazil is no more likely to trigger a pandemic than markets suffer, notably in the Eurozone and UK. many other places. Where the pandemic starts is less important than how it spreads and its severity. Behind the pandemic scenario Quickly goes global Scenario selection The virus rapidly spreads around the world by The historical record dating back to the Plague of infected air travel passengers. Although in each Athens in 430 BC gives a long perspective on country the infection wave is over in weeks, it takes disease epidemics. The influenza virus, which around 7 months for it to spread around the globe, mutates rapidly, provides the seed for imagining a causing international disruption. highly unlikely, highly impactful pandemic. Racing to produce a vaccine The São Paulo Virus Pandemic scenario was selected, in partnership with Risk Management Until a vaccine is available, there is nothing to Solutions, from the probabilistic event set of the prevent the spread. Antiviral drugs help to reduce RMS Infectious Disease Model. the impact of the infection but the global demand exceeds supply. Public healthcare capacity is Variants of the scenario quickly overwhelmed even in countries with We give several variants: a ‘standard’ scenario (S1) advanced health systems. Shortfalls in healthcare of an influenza virus which is very infectious and capacity increase the death toll. moderately virulent; a similar scenario but assuming public health response measures are poor 2 São Paulo Virus Pandemic Scenario Government responses Lost global output of more than $7 trillion Once the World Health Organization has declared a The pandemic triggers a global recession, which pandemic, governments respond by closing schools bottoms out about a year after the pandemic starts. and suspending public gatherings to reduce contact The consequences are felt for several years rates in the population; and administering the afterwards, with the overall effects being measured vaccine when it becomes available. This is in lost GDP output over 5 years (‘GPD@Risk’) of eventually successful in curtailing the pandemic. $7 trillion, ranging to $23 trillion in the more extreme variant – greater than the $20 trillion Direct impacts of the pandemic scenario output estimated lost as a result of the Great Financial Crisis of 2007-2012. Workforce absenteeism The pandemic-driven recession impacts different In the course of the São Paolo Virus Pandemic, countries’ interest rates, balance