How Does Life Settlement Affect the Primary Life Insurance Market?

Hanming Fang and Edward Kung ()
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Edward Kung: Department of Economics, Duke University

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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).

Keywords: Life insurance; dynamic insurance; secondary market (search for similar items in EconPapers)
JEL-codes: G22 L11 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2010-02-09
New Economics Papers: this item is included in nep-ias and nep-rmg
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Citations: View citations in EconPapers (12)

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Working Paper: How Does Life Settlement Affect the Primary Life Insurance Market? (2010)
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