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Modeling pandemic mortality risk and its application to mortality-linked security pricing

Author

Listed:
  • Chen, Fen-Ying
  • Yang, Sharon S.
  • Huang, Hong-Chih

Abstract

To provide insights for how to deal with pandemic mortality risk, this article introduces a mortality model that depicts the relevant pandemic effects on pricing mortality-linked securities, using a threshold jump approach. That is, to capture pandemic mortality dynamics across countries, we consider mortality jumps related to the pandemic shock and to a specific country shock. Pandemic jump occurs only when a pandemic event causes significant deaths worldwide, such as 1918 Spanish flu or COVID-19. Then the proposed pandemic mortality model can be adjusted according to country-specific mortality experiences. We further analyze the effect of pandemic mortality risk on pricing a mortality-linked bond. Using the first Swiss Re mortality bond as an example, a further derivation obtains the closed-form solution for the fixed-coupon mortality-linked bond in the pandemic mortality framework. Finally, this study details the impacts of pandemic mortality risk numerically by fitting the model to the United States, England and Wales, France, Italy, and Switzerland and calculating the fair spread of the mortality-linked bond.

Suggested Citation

  • Chen, Fen-Ying & Yang, Sharon S. & Huang, Hong-Chih, 2022. "Modeling pandemic mortality risk and its application to mortality-linked security pricing," Insurance: Mathematics and Economics, Elsevier, vol. 106(C), pages 341-363.
    • Handle: RePEc:eee:insuma:v:106:y:2022:i:c:p:341-363
    DOI: 10.1016/j.insmatheco.2022.06.002
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    More about this item

    Keywords

    Pandemic mortality risk; COVID-19; Wang transform; Mortality-linked security; Threshold jump approach;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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