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How Does Life Settlement Affect the Primary Life Insurance Market?

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Author Info

  • Hanming Fang

    ()
    (Department of Economics, University of Pennsylvania)

  • Edward Kung

    ()
    (Department of Economics, Duke University)

Abstract

We study the effect of the life settlement market on the structure of long term contracts offered by the primary market for life insurance, as well as the effect on consumer welfare, using a dynamic model of life insurance with one sided commitment and bequest-driven lapsation. We show that the presence of life settlement affects the extent as well as the form of dynamic reclassification risk insurance in the equilibrium of the primary insurance market, and that the settlement market generally leads to lower consumer welfare. We also examine the primary insurers’ response to the settlement market when they can offer enriched contracts by specifying optimally chosen cash surrender values (CSVs).

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Bibliographic Info

Paper provided by Penn Institute for Economic Research, Department of Economics, University of Pennsylvania in its series PIER Working Paper Archive with number 10-006.

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Length: 44 pages
Date of creation: 09 Feb 2010
Date of revision:
Handle: RePEc:pen:papers:10-006

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Keywords: Life insurance; dynamic insurance; secondary market;

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Cited by:
  1. Daniel Gottlieb & Kent Smetters, 2012. "Narrow Framing and Life Insurance," NBER Working Papers 18601, National Bureau of Economic Research, Inc.
  2. Yoshizawa, Takuya, 2014. "Characteristics of insurance contracts suitable to benefit value insurance settlements," 商学討究 (Shogaku Tokyu), Otaru University of Commerce, vol. 64(4), pages 235-255.
  3. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2011. "Welfare costs of reclassification risk in the health insurance market," Working Paper Series, Center for Fiscal Studies 2011:13, Uppsala University, Department of Economics.

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