How Does Life Settlement Affect the Primary Life Insurance Market?
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).
We would like to thank Jacques Crémer, Alessandro Lizzeri, George Mailath, Andrew Postlewaite, Wing Suen and seminar participants at Duke University, Hong Kong University, Peking University, University of Pennsylvania and the 2009 Econometric Society Summer Meeting in Boston for stimulating discussions. Fang would also like to gratefully acknowledge the generous financial support from the National Science Foundation through Grant SES-0844845. All remaining errors are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.