Extreme Mortality Bond (EMB) is a special type of catastrophe bond designed to raise funds by insurance companies in the event of a natural disaster that leads to excessive mortality.
In case of an event associated with a large-scale loss of life (for example, an earthquake, a pandemic, etc.), insurance companies are forced to pay large compensation amounts for a large number of insured events. To reduce this kind of risk, insurers resort to securitization of issued policies, otherwise known as extreme mortality bonds (EMBs).
Like catastrophe bonds, these issues are high-yielding debt instruments and they are sold with maturities of three to five years. If no extreme event occurs during the investment period, the insurance company pays the investors the principal plus interest. Otherwise, the issuing insurance company uses this amount as compensation for losses from insured events. Usually the interest rate for such bonds is higher than the rate of most issued fixed income securities. These instruments are also attractive to an investor who wants to diversify his portfolio, as such bonds are made by a low correlation with events taking place in global markets.
In order for an insurance company to avoid paying interest and principal on EMB bonds to investors, the death rate from an emergency event in some regions should increase by 20-40% compared to the average values. For example, in the US, the number of deaths in such a case should be increased by 500,000 per year.
Example: La Vie Re, FRN 6oct2023, USD