Working Paper: NBER ID: w15761
Authors: 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).
Keywords: Life Settlement; Life Insurance; Consumer Welfare
JEL Codes: G22; L11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| life settlement market (G52) | dynamic reclassification risk insurance (G22) |
| life settlement market (G52) | consumer welfare (D69) |
| life settlement market (G52) | insurance contracts (G22) |
| dynamic reclassification risk insurance (G22) | consumer welfare (D69) |
| life settlement market (G52) | collapse of reclassification risk insurance (G22) |