Mitigating Financial Impact of Pandemics: A Collaborative Pandemic Bond Approach

This paper presents an innovative pandemic bond aimed to buffer the financial blow of pandemics on life insurers and similar entities at risk. Issued by private entities such as (re)insurers, this bond bases its payoff on pandemic data released by public bodies like the World Health Organization, ensuring transparency and promptness of bond payments while avoiding information asymmetry and moral hazards. The bond's pricing and hedging efficiency are scrutinized using a stochastic Susceptible-Infected-Recovered-Deceased model, constructed to project pandemic transmission and simulate future pandemic scenarios. Utilizing U.S. Covid-19 data, our numerical analysis affirms the model's proficiency in producing credible probabilistic predictions of pandemic-induced excess mortality, while underscoring the bond's efficacy in hedging mortality risk associated with pandemics for life insurers. This proposed bond is poised to serve as a significant addition to both public and private reinsurance programs tackling pandemic risks.