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
Date Written: September 29, 2021
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: Suggested Citation