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Price Regulation in Secondary Insurance Markets

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  • Jay Bhattacharya
  • Dana Goldman
  • Neeraj Sood

Abstract

Secondary life insurance markets are growing rapidly. From nearly no transactions in 1980, a wide variety of similar products in this market has developed, including viatical settlements, accelerated death benefits, and life settlements and as the population ages, these markets will become increasingly popular. Eight state governments, in a bid to guarantee sellers a “fair” price, have passed regulations setting a price floor on secondary life insurance market transactions, and more are considering doing the same. Using data from a unique random sample of HIV+ patients, we estimate welfare losses from transactions prevented by binding price floors in the viatical settlements market (an important segment of the secondary life insurance market). We find that price floors bind on HIV patients with greater than 4 years of life expectancy. Furthermore, HIV patients from states with price floors are significantly less likely to viaticate than similarly healthy HIV patients from other states. If price floors were adopted nationwide, they would rule out transactions worth $119 million per year. We find that the magnitude of welfare loss from these blocked transactions would be highest for consumers who are relatively poor, have weak bequest motives, and have a high rate of time preference.

Suggested Citation

  • Jay Bhattacharya & Dana Goldman & Neeraj Sood, 2004. "Price Regulation in Secondary Insurance Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 643-675, December.
  • Handle: RePEc:bla:jrinsu:v:71:y:2004:i:4:p:643-675
    DOI: 10.1111/j.0022-4367.2004.00107.x
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    References listed on IDEAS

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    1. Abel, Andrew B, 1986. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," Econometrica, Econometric Society, vol. 54(5), pages 1079-1097, September.
    2. Schackman, B.R. & Goldie, S.J. & Weinstein, M.C. & Losina, E. & Zhang, H. & Freedberg, K.A., 2001. "Cost-effectiveness of earlier initiation of antiretroviral therapy for uninsured HIV-infected adults," American Journal of Public Health, American Public Health Association, vol. 91(9), pages 1456-1463.
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    Cited by:

    1. Nadine Gatzert & Gudrun Hoermann & Hato Schmeiser, 2009. "The Impact of the Secondary Market on Life Insurers’ Surrender Profits," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 76(4), pages 887-908, December.
    2. Martin Eling & David Pankoke, 2016. "Costs and Benefits of Financial Regulation: An Empirical Assessment for Insurance Companies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 529-554, October.
    3. Mar Jori & Antonio Alegre & Carmen Ribas, 2011. "Deciding the sale of a life policy in the viatical market: Implications on individual welfare," Working Papers in Economics 256, Universitat de Barcelona. Espai de Recerca en Economia.
    4. Carmelo Giaccotto & Joseph Golec & Bryan P. Schmutz, 2017. "Measuring the Performance of the Secondary Market for Life Insurance Policies," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 84(1), pages 127-151, March.
    5. Nadine Gatzert, 2010. "The Secondary Market for Life Insurance in the United Kingdom, Germany, and the United States: Comparison and Overview," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 13(2), pages 279-301, September.

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