Managing HIV/AIDS risk: An enterprise risk management model

The World Bank's study assesses how AIDS is expected to affect the financial sector in general and the insurance companies in particular in South Africa. The paper for the first time attempts to develop an enterprise risk management methodology to assess the “impact of HIV/AIDS on the financial sector”.

It also examines the trade-off between proactive and reactive risk management strategies in addressing the risk of HIV/AIDS at workplace and on business.

The paper develops a case for a proactive approach by the financial sector in addressing the AIDS challenge. There are six sections:

• Developing a risk management approach that could be used by corporations to manage their business risks.
• The framework and methodology in assessing/quantifying the risk of HIV.
• An analysis of the impact of HIV on the Financial Sector in South Africa using the methodology developed earlier.
• Alternative approaches, including cost-benefit analysis, for risk mitigation and risk retention of HIV/AIDS at the work place.
• The role of the insurance sector in responding to the needs of businesses in managing the risk.
• Recommendations and conclusions in dealing with HIV/AIDS risk.

Click here to view the document on the World Bank website.

The Long-run Economic Costs of AIDS: Theory and an Application to South Africa (June 2003)

Most existing estimates of the macroeconomic costs of AIDS, as measured by the reduction in the growth rate of GDP, are modest. For Africa – the continent where the epidemic has hit the hardest – they range between 0.3 and 1.5 percent annually.

The reason is that these estimates are based on an underlying assumption that the main effect of increased mortality is to relieve pressure on existing land and physical capital so that output per head is little affected. We argue that this emphasis is misplaced and that, with a more plausible view of how the economy functions over the long run, the economic costs of AIDS are almost certain to be much higher. Not only does AIDS destroy existing human capital, but by killing mostly young adults, it also weakens the mechanism through which knowledge and abilities are transmitted from one generation to the next; for the children of AIDS victims will be left without one or both parents to
love, raise and educate them.

To analyse this problem, the researchers used an overlapping generations (OLG) model, in which parents have preferences over current consumption and the (expected) human capital attained by their children. Two family structures are analyzed: ‘nuclear’ and ‘pooling’, whereby under the latter all children are cared for within an extended family.

When calibrated to South Africa, the model yields the following results. In the absence of AIDS, the counterfactual benchmark, there is modest growth, with universal and complete education attained within three generations. If nothing is done to combat the epidemic, however, a complete economic collapse will occur within three generations. With optimal spending on combating the disease, and if there is pooling, growth is maintained, albeit at a somewhat slower rate than in the benchmark case in the absence of AIDS.

If pooling breaks down, and is replaced by nuclear families, growth will be slower still. Indeed, if school-attendance subsidies are not possible, growth will be distinctly sluggish. In all three cases, the additional fiscal burden of intervention will be large, which reinforces the gravity of the findings. Sensitivity analysis suggests that these findings are robust to changes in a variety of key assumptions and parameter values concerning mortality, the efficiency of measures taken to combat it, and the formation of expectations. A delay in responding to the outbreak of the epidemic, however, can lead to a collapse.

Click here to access the report on the World Bank website: