Extreme mortality bond

The extreme mortality bond is a securitization instrument by which a life insurer or reinsurer transfers to capital markets the risk of abrupt, large-scale excess mortality, typically linked to a pandemic, major disaster or extreme event. Built on the catastrophe bond model, it provides that investors lose all or part of their capital if a mortality index exceeds a predefined threshold on a reference population, the issuer then recovering these funds to cover its losses. It is the death-side counterpart of longevity bonds which conversely cover the risk of prolonged survival. This type of instrument allows life insurers to protect their capital against a catastrophe mortality shock hard to fully reinsure through traditional means, and offers investors a risk decorrelated from financial markets. The pandemic tested the relevance of these structures and revived interest in transferring extreme mortality risk to capital markets. The design of the index and threshold determines the effectiveness of the cover and the basis risk assumed.