The Impact of Mortality Shocks on Modeling and Insurance Valuation as Exemplified by COVID-19

25 Pages Posted: 28 Apr 2021 Last revised: 30 Sep 2021

See all articles by Simon Schnürch

Simon Schnürch

Fraunhofer Gesellschaft - Fraunhofer Institute for Industrial Mathematics ITWM; University of Kaiserslautern - Department of Mathematics

Torsten Kleinow

Humboldt University of Berlin

Ralf Korn

University of Kaiserslautern - Department of Mathematics

Andreas Wagner

Karlsruhe University of Applied Sciences

Date Written: September 29, 2021

Abstract

The COVID-19 pandemic interrupts the relatively steady trend of improving longevity observed in many countries over the last decades. We claim that this needs to be addressed explicitly in many mortality modeling applications, for example in the life insurance industry. To support this position, we provide a descriptive analysis of the mortality development of several countries up to and including the year 2020. Furthermore, we perform an empirical and theoretical investigation of the impact a mortality jump has on the parameters, forecasts and implied present values of the popular Lee-Carter mortality model. We find that COVID-19 has resulted in substantial mortality shocks in many countries. We show that such shocks have a large impact on point and interval forecasts of death rates and, consequently, on the valuation of mortality-related insurance products. We obtain similar findings under the Cairns-Blake-Dowd mortality model, which demonstrates that the effects caused by COVID-19 show up in a variety of models. Finally, we provide an overview of approaches to handle extreme mortality events such as the COVID-19 pandemic in mortality modeling.

Keywords: COVID-19, mortality modeling, mortality forecasting, mortality jumps, Lee-Carter model

JEL Classification: J11, C53, G22

Suggested Citation

Schnürch, Simon and Kleinow, Torsten and Korn, Ralf and Wagner, Andreas, The Impact of Mortality Shocks on Modeling and Insurance Valuation as Exemplified by COVID-19 (September 29, 2021). Available at SSRN: https://ssrn.com/abstract=3835907 or http://dx.doi.org/10.2139/ssrn.3835907

Simon Schnürch (Contact Author)

Fraunhofer Gesellschaft - Fraunhofer Institute for Industrial Mathematics ITWM ( email )

Fraunhofer-Platz 1
Kaiserslautern, 67663
Germany

HOME PAGE: http://www.itwm.fraunhofer.de

University of Kaiserslautern - Department of Mathematics

D-67653 Kaiserslautern
Germany

Torsten Kleinow

Humboldt University of Berlin ( email )

Spandauer Str. 1
Institute for Statistics and Econometrics Department of Business Administration
D-10178 Berlin
Germany

Ralf Korn

University of Kaiserslautern - Department of Mathematics ( email )

D-67653 Kaiserslautern
Germany

Andreas Wagner

Karlsruhe University of Applied Sciences ( email )

Karlsruhe
Germany

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