Did the 1918–19 Influenza Pandemic Kill the US Life Insurance Industry?

by Gustavo Cortes & Gertjan Verdickt

The introduction and abstract:

he 1918–19 influenza pandemic is a health catastrophe estimated to have caused millions of deaths worldwide. In fact, influenza killed more Americans than all wars in the twentieth century combined (Clay et al., 2019). Recent studies have also shown its significant and long-lasting effects on economic growth(Carillo and Jappelli, 2020; Jordà et al., 2020). Among all industries, life insurers are arguably the most affected by excess mortality. Epidemic catastrophes could impact an insurer’s balance sheet in two ways. First,through unexpectedly high losses to be paid out in death claims to clients. Second, through low (or negative) returns from financial assets held in an insurer’s portfolio. Indeed, the life insurance industry has shown to be vulnerable to recent business cycles(Beck and Webb, 2003) and the COVID–19 outbreak(Koijen and Yogo, 2020). This paper examines the insurance industry’s long-run resilience to one of the deadliest epidemics of the last 150 years: the 1918–19 influenza.

We document two puzzling facts during the 1918–19 influenza outbreak. First, we find no significant differences among US life insurers’ profitability before or after 1918. Second, there are fewer insurers in distress after the outbreak. We argue that an increase in insurance demand offset higher death claim payouts. Moreover, we find that life insurers from heavily affected states were more likely to issue equity. The prudential control of state regulators also mitigated financial difficulties. The influenza pandemic, while severe from a public health perspective, was arguably a blessing in disguise for the sector.