Learning from COVID-19: A catastrophe mortality bond solution in the post-pandemic era

The development of robust financial instruments to mitigate pandemic-induced mortality risks has become increasingly critical, particularly for the insurance sector, in the aftermath of COVID-19. This paper introduces a novel pandemic bond designed to alleviate the financial burden on life insurers and reinsurers exposed to pandemic-related mortality risks. The bond's payouts are linked to publicly available pandemic data, enhancing transparency, ensuring timely payments, and mitigating the risks of information asymmetry and moral hazard. A stochastic Susceptible-Infected-Recovered-Deceased (SIRD) model is developed to evaluate the pricing and hedging performance of the PAN bond. Numerical analysis based on U.S. COVID-19 data illustrates the proposed SIRD model's effectiveness in generating reliable probabilistic forecasts of excess mortality and demonstrates the bond's potential as an effective hedge against pandemic-induced mortality risks.