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How Does Life Settlement Affect the Primary Life Insurance Market?

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  • Hanming Fang
  • Edward Kung

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).

Suggested Citation

  • Hanming Fang & Edward Kung, 2010. "How Does Life Settlement Affect the Primary Life Insurance Market?," NBER Working Papers 15761, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15761 Note: IO PE
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    References listed on IDEAS

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    1. Neil A. Doherty & Hal J. Singer & October, "undated". "The Benefits of a Secondary Market ForLife Insurance Policies," Center for Financial Institutions Working Papers 02-41, Wharton School Center for Financial Institutions, University of Pennsylvania.
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    Cited by:

    1. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2015. "Welfare costs of reclassification risk in the health insurance market," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 21-44.
    2. repec:eee:hapoch:v1_237 is not listed on IDEAS
    3. 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.
    4. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2017. "Exit, Voice or Loyalty? An Investigation into Mandated Portability of Front-Loaded Private Health Plans," NBER Working Papers 23468, National Bureau of Economic Research, Inc.
    5. Daniel Gottlieb & Kent Smetters, 2012. "Narrow Framing and Life Insurance," NBER Working Papers 18601, National Bureau of Economic Research, Inc.
    6. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, Elsevier.

    More about this item

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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