Managing HIV/AIDS at Workplace a Risk Management Framework

HIV/AIDS: Financial Sector Issues

Vijayasekar Kalavakonda

World Bank

Financial Operations and Policy Department

June 2005

TABLE OF CONTENTS

1. Introduction and background

Introduction

Background

2. The Risk Management Approach

3. Methodology for Assessing the Risk of HIV at the Workplace

4. Impact of HIV/AIDS on the Financial Sector

The “Before AIDS” scenario

The “With AIDS” scenario

5. External Cost of HIV/AIDS on the Financial Sector – the case of South Africa

6. Cost-benefit analysis of risk mitigation and risk retention

7. The Role of and Response by the Financial and Insurance Sector in Managing the Risk

8. Conclusions and Recommendations

Bibliography

Annex 1 : Overview of AIDS modeling

Annex 2: Actuarial Solutions Multi-State AIDS Projection Model

Annex 3: Summary of the Assumed Employee Profile

Annex 4: Antiretroviral (ARV) Therapy

Annex 5: Summary of how prevalence varies by country, industry, grade and salary

Annex 6: Assumptions

Figure 1: Enterprise Level impact

Figure 2: Risk Management Framework

Chart 1: Modeled HIV sero-conversion rates (rates of new HIV infections) for the financial services industry in South Africa by province

Chart 2: Median term to death for an adult aged 30 years and 50 years of sero-conversion

Chart 3: Proportion of employees in various HIV states for Financial Services Company in Gauteng province

Chart 4: Cost of AIDS to the hypothetical financial services company (as a percentage of payroll)

Chart 5: The AIDS Burden: Total cost of Aids to the hypothetical financial service’s company

Chart 6: “Cost” of intervention strategies

Table 1: Number of people affected by HIV

Table 2: Cost of employee benefits and economic costs from business interruptions for the hypothetical financial service’s company ignoring HIV/AIDS

Table 3: Cost of employee benefits and economic costs from business interruptions for the hypothetical financial service’s company allowing for HIV/AIDS

Table 4: Net Cost of employee benefits and economic costs from business interruptions for the hypothetical financial services company allowing for HIV/AIDS

Table 5: Life Expectancy in South Africa, 1960 - 2004

Table 6: Birth and death rates per 1,000 of population in South Africa over the last 50 years, 1960 – 2004.

Table 7: Life insurance products

Table 8: Key risk areas to Financial Sector due to HIV/AIDS

Table 9: Number of employees in different HIV+ State

Table 10: Cost of therapy

Table 11: “Cost” of intervention strategies

Table 12: HIV/AIDS Cost allowing for HIV/AIDS and the provision on antiretroviral therapy

Table 13: “Benefit” to the company of all employee benefits to the workforce following HAART intervention

Table 14:HIV/AIDS Cost of Employee benefits allowing for a reduction of incidence rates by 15% from 2004

Table 15: “Benefit” to the company of all employee benefits to the workforce following PREVENTION strategy

Acknowledgment

The author would like to thank D.H. Schneider and N.J. Kelly, Actuarial Solutions, Botswana for there contribution on the actuarial modeling. The author would also like to thank the Irish Consultants Fund without whose support the paper would not have been possible. The author is grateful for the comments provided by Rodney Lester …………...

Professor Rob Dorrington assisted with the incidence biases used in the paper.

Abstract

Assess the cost of AIDS to a typical employer in South Africa operating in the financial services sector. To assess how AIDS is expected to affect the financial sector in general and the insurance companies in particular operating in South Africa. The paper for the first time attempts to develop a methodology to assess the “impact of HIV/AIDS on the financial sector” using classical actuarial models used by insurance companies.

The paper goes on to examine the trade-off between proactive and reactive risk management strategies in addressing the risk of HIV/AIDS at workplace and on business.

Abbreviations

ADAP / AIDS Drug Assistance Program
ARC / AIDS Related Condition
ASO / AIDS Standard Organization
ASSA / Actuarial Society of South Africa
HAART / Highly Active Anti-Retroviral Therapy
PMB / Prescribed Minimum Benefits
VCT / Voluntary Counseling and Testing

1. Introduction and background

Introduction

The impact of HIV/AIDS on the financial sector has received very little attention and this study is intended to be a stimulus for further policy development. The impact of HIV on the financial sector is multi-faceted in that it can not only affect the management costs of an institution (increasing absenteeism, higher labor costs, increased premium outflows for employer provided group benefits and so on) but also its basic business model. For example the banking sector may be affected by changes in savings levels and negative effects on the loan market: a recent study on the credit risk of retailers in South Africa[1] has already identified the potential for increased rates of credit default. Similarly, the insurance sector, particularly the life and medical sectors, is heavily exposed to HIV/AIDS. Group life and group health coverage provided by an employer is particularly vulnerable to worsening experience because cover is often obtained without proof of insurability.

The paper is structured so as to develop a case for a pro active approach by the financial sector is addressing the AIDS challenge. Sectiontwo focuses on developing a risk management approach that could be used by corporations to manage their business risks. Section three dwells on the framework and methodology in assessing/quantifying the risk of HIV, section four is an analysis of the impact of HIV on the Financial Sector in South Africa using the methodology developed earlier. Section five discusses alternative approaches, including cost-benefit analysis, for risk mitigation and risk retention of HIV/AIDS at the work place. Section six highlights the role of the insurance sector in responding to the needs of the businesses in managing the risk. The final section deals with recommendations and conclusions in dealing with HIV/AIDS risk.

Background

The number of people living with HIV/AIDS globally has been rising rapidly (18 percent growth from 2000 – 2004 per UNAIDS), with the steepest increases found in countries that have been witnessing strong economic growth, such as China,India, and Russia.
The spread of HIV in Russia is on par with some African countries, and has the potential to be a major catastrophe in the future if it continues at current rates. The official number infected with HIV by the end of 2004 was estimated at 280,000, and is expected to rise to 350,000 by end of 2005, but many experts feel that the real figure could be far higher: indeed the WHO has estimated that there could be up to one million. Most of those infected are in the 15 to 25 years age range.
China is estimated to have nearly one million diagnosed cases of HIV and about five million suffering from tuberculosis. According to recent projections the number of HIV/AIDS cases could rise to 10 million to 20 million by 2010.India is thought to have the highest number of HIV/AIDS cases in the World. In March 2002 official estimates showed that there were 3.97 million HIV-positive cases in India, but unofficial estimates show the real figure to be closer to five million.The World Bank estimates that HIV prevalence in India is doubling in certain groups every one to two years.
There have been various studieshighlighting the impact (or severity) of HIV/AIDS at three levels – societal, economic and business. For example, the UNAIDS report[2] indicated that more than 3.1 million people died of HIV in 2004 (Table 1). In South Africa HIV is the second leading cause of death accounting for more than 8.7 percent of all deaths.

Table 1: Number of people affected by HIV

People with HIV (Adults and Children) / Total Number / New Infection in 2004 / Death due to AIDS in 2004
Africa / 25,400,000 / 3,100,000 / 2,300,000
South and South East Asia / 7,100,000 / 890,000 / 490,000
Latin America / 1,700,000 / 240,000 / 95,000
Eastern Europe and Central Asia / 1,400,000 / 210,000 / 60,000
East Asia / 1,100,000 / 290,000 / 51,000
North America / 1,000,000 / 44,000 / 16,000
Western Europe / 610,000 / 21,000 / 6,500
North Africa and Middle East / 540,000 / 92,000 / 28,000
Caribbean / 440,000 / 53,000 / 36,000
Oceania / 35,000 / 5,000 / 700
TOTAL / 39,325,000 / 4,900,000 / 3,100,000

Source: AIDS Epidemic Update, UNAIDS (December, 2004)

At the economic level the figures are equally sobering. A recent study for South Africa indicates that the impact of HIV/AIDS on aggregate output can be devastating if the long-term, cumulative negative effects of the disease on human capital formation are taken into account. According to this framework, by killing mostly young adults, AIDS does more than destroy the human capital embodied in them; it also deprives their children of those very things they need to become economically productive adults––their parents’ nurturing, knowledge and capacity to finance education. This weakening of the mechanism through which human capital is transmitted and accumulated across generations becomes apparent only after a long lag and is progressively cumulative in its effects. A recent UNDP report[3] on HIV/AIDS in Eastern Europe and Commonwealth of Independent States (CIS) warns that the disease threatens to seriously affect the region’s prospects for economic growth by putting new strains on already overburdened social protection systems: premature morbidity could reduce annual GDP growth by up to one percentage point.
HIV/AIDS’ impact on businesses has also received attention. When HIV/AIDS affects appreciable numbers in the work force, businesses face significant added costs and reduced revenues. HIV/AIDS affects businesses’ competitiveness in three ways (Figure 1). Direct costs, such as labor, increase. When sick employees miss work, worker productivity declines and employee turnover, healthcare expenses, and social burdens such as insurance premiums and death benefits increase. Indirect costs, such as low morale and strained relations between workers and management, often occur. Businesses also experience increases in “intangible” costs such as damage to corporate reputations.
The impact of HIV/AIDS has been devastating. In a sugar mill in South Africa infected workers incur, on average, 55 additional days of sick leave during the last two years of their life (Morris et al 2001). Similarly, a study on sugar estate in Kenya found that 25 percent of the estate's workforce was infected with HIV (Roberts et al 1996). In Botswana, it has been estimated that 35 to 40 percent of all teachers are infected with HIV[4].

Figure 1: Enterprise Level impact

2. The Risk Management Approach

Risk management is the process of planningand controlling an organization's activities in order to minimize the effects of risk on its capital and earnings. Enterprise risk management (ERM) expands the process to include not just risks associated with accidental losses, but also financial, strategic, operational, and other risks (Tillinghast – Towers, 2000). Industry and regulatory bodies, as well as investors, have begun to scrutinize companies' risk-management policies and procedures, making ERM increasingly important.
In the case of AIDS the first step in the process involves assessing potential losses from HIV on a probabilistic basis, allowing for unreported cases, followed by the adoption of sensible and cost effective mitigationactivities. There are a number of interventions that a company may embark upon to mitigate the effects of HIV/AIDS within the workforce. The approach followed by many companies has been to attempt to reduce infection rates. This is done typically by trying to change behavior through education programs, voluntary counseling and testing (VCT) and making condoms widely available. Companies are now increasingly looking at making treatment available to affected staff to complement established prevention strategies.Price discovery signals[5] advised through the risk funding and transfer markets can also act as a positive influence in augmenting the mitigation effort.
The decision model should also provide guidance as to the most effective funding and risk transfer mechanisms for residual risk, allowing for longer term economic and social imperatives.

Figure 2: Risk Management Framework

Identify Loss Potential

Risk Retention

Risk Avoidance

Risk Control

Risk Funding/ Risk Transfer

3. Methodology for Assessing the Risk of HIV at the Workplace

South Africa has been taken as the case study for this paper[6] and the Actuarial Society of South Africa (ASSA) 2000 Full model [7] was employed.From the country-wide demographic projections, the probability that an individual in the population sero-converts (becomes infected with the HI Virus) was derived, the probability being a function of age, race, province, gender and calendar year.

Chart 1: Modeled HIV sero-conversion rates (rates of new HIV infections) for the financial services industry in South Africa by province

As can be seen in the above curve (Chart1), financial services companies tend to have lower incidence rates than the national rates, due to the selective effects of employment. Employees generally have lower incidence and prevalence rates relative to national averages – but there are exceptions to this rule - most notably truck drivers (Whiteside, 2001) and executives in the earlier stages of the epidemic.
The length of time that an individual, who has just sero-converted, remains in an HIV (positive) state[8] was modeled next. This was done using the Actuarial Solutions Multi-State AIDS Projection Model (graphically summarized in Annex 2). The incidence rates were scaled to reflect the skill level and salary grade of an employee. This was done to reflect the differing levels of education, likely treatment of sexually transmitted infections and awareness amongst differing staff members in line with the approach outlined by Schneider (2000)[9].
The curves below (Chart 2) demonstrate the average median term between each of the states –

a)10 years for adults who sero-converted before age 30

b)9 years for adults who sero-converted between the ages of 30 and 39, and

c)8 years for adults who sero-converted after age 39

Chart 2: Median term to death for an adult aged 30 years and 50 years of sero-conversion

A representative company was chosen to demonstrate the impact of AIDS on financial companies in South Africa under a variety of differing employee benefit structures and based in different provinces within South Africa. The employee profile of the company is summarized in Annex 3. For the purpose of this paper it is assumed that the company is based in Gauteng province and employs 1,000 South African citizens. Results differ in practice according tothe benefits provided to employees and location of the company in question.
The projection model was then run for each employee of the representative company, to assess the proportion of staff that are HIV+ and in the various HIV states (Asymptomatic, ARC and AIDS Sick). The model projected each member actively employed between 2003 and 2045, allowing for normal death, normal withdrawal, non-AIDS ill-health exits, retirement exits and AIDS deaths/disabilities.
The projected staff profile decreases as members die, retire and withdraw. The hypothetical company that was considered is expected to maintain their staff complement over the next 10 years, recruiting new members to replace those that leave/die. The model allowed for these new members on the basis that all prospective employees are sent for a standard medical examination (but not an HIV test) prior to being employed. Under these examinations, it is expected that doctors should be able to assess whether individuals are sick with AIDS, (or possibly in ARC state), and that AIDS sick individuals are less likely to be employed. The graph below (Chart 3) summarizes the expected proportion of the workforce in the various HIV states over time, allowing for new entrants for a financial services company in Gauteng province.

Chart 3: Proportion of employees in various HIV states for Financial Services Company in Gauteng province

4. Impact of HIV/AIDS on the Financial Sector

Based on the projected development of the HIV epidemic by employee grade and the method outlined in Section 3 of this paper, the impact of AIDS on the internal cost of financial services company’s was derived. The internal cost element consists of employee benefits (group life insurance, medical scheme, provident, funeral benefits), absenteeism, disabilities, reduced productivity, replacement and retraining cost.

The “Before AIDS” scenario

The table below (Table 2) summarizes the present value of future economic costs expected to be incurred by the hypothetical financial service company in Gauteng, South Africa.

Table 2: Cost of employee benefits and economic costs from business interruptions for the hypothetical financial service’s company ignoring HIV/AIDS

Table2highlights:

a)The current cost of providing a pension together with group life/disability insurance amounts to 8.9% of payroll for the employer (with employees paying a fixed 7.5% of basic payroll);

b)Replacement/Rehiring costs amount to roughly 2% of payroll;

c)Sick leave costs, and losses from business interruptions amount to roughly 4½% of payroll; and

d)Maternity benefits together with medical aid subsidization and group funeral costs amount to roughly 8% of payroll.

The “With AIDS” scenario

Table 3 is based on the same computation as that used above – but allows for the impact of HIV/AIDS.

Table 3:Cost of employee benefits and economic costs from business interruptions for the hypothetical financial service’s company allowing for HIV/AIDS