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How Does Life Settlement Affect the Primary Life Insurance Market?

Author

Listed:
  • 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).

Suggested Citation

  • Hanming Fang & Edward Kung, 2010. "How Does Life Settlement Affect the Primary Life Insurance Market?," PIER Working Paper Archive 10-006, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:10-006
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    Cited by:

    1. Juan Pablo Atal & Hanming Fang & Martin Karlsson & Nicolas R. Ziebarth, 2019. "Exit, Voice, or Loyalty? An Investigation Into Mandated Portability of Front‐Loaded Private Health Plans," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(3), pages 697-727, September.
    2. Seog, S. Hun & Hong, Jimin, 2019. "The efficiency effects of life settlement on the life insurance market," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 395-412.
    3. Liviu Purcărea & Carmen Valentina Rădulescu & Andreea Maria Mănescu, 2024. "Benefits of integrating sustainability into insurance companies," Journal of Financial Studies, Institute of Financial Studies, vol. 9(17), pages 129-142, November.
    4. James M. Carson & Cameron M. Ellis & Robert E. Hoyt & Krzysztof Ostaszewski, 2020. "Sunk Costs and Screening: Two‐Part Tariffs in Life Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(3), pages 689-718, September.
    5. Alexander Braun & Sarah Affolter & Hato Schmeiser, 2016. "Life Settlement Funds: Current Valuation Practices and Areas for Improvement," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 19(2), pages 173-195, September.
    6. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    7. Fang, Hanming & Wu, Zenan, 2020. "Life insurance and life settlement markets with overconfident policyholders," Journal of Economic Theory, Elsevier, vol. 189(C).
    8. 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.
    9. 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.
    10. 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.
    11. Hanming Fang & Edward Kung, 2021. "Why do life insurance policyholders lapse? The roles of income, health, and bequest motive shocks," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(4), pages 937-970, December.
    12. Daniel Gottlieb & Kent Smetters, 2012. "Narrow Framing and Life Insurance," NBER Working Papers 18601, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

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    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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