Life insurance and life settlement markets with overconfident policyholders

Abstract

We analyze how the life settlement market-the secondary market for life insurance-may affect consumer welfare in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. As in Daily et al. (2008) and Fang and Kung (2010), policyholders may lapse their life insurance policies when they lose their bequest motives; but in our model the policyholders may underestimate their probability of losing their bequest motive, or be overconfident about their future mortality risks. For the case of overconfidence with respect to bequest motives, we show that in the absence of life settlement overconfident consumers may buy "too much" reclassification risk insurance for later periods in the competitive equilibrium. In contrast, when consumers are overconfident about their future mortality rates in the sense that they put too high a subjective probability on the low-mortality state, the competitive equilibrium contract in the absence of life settlement exploits the consumer bias by offering them very high face amounts only in the low-mortality state. In both cases, life settlement market can impose a discipline on the extent to which overconfident consumers can be exploited by the primary insurers. We show that life settlement may increase the equilibrium consumer welfare of overconfident consumers when they are sufficiently vulnerable in the sense that they have a sufficiently large intertemporal elasticity of substitution of consumption.

The influence of climate change on the life insurance in the EU: A panel data approach

“…Life insurance can be understood as a long-term investment that requires periodic payments. This type of insurance is targeted at policyholders who want to prevent an economic catastrophe for their dependents when they die [18] or to provide for old age if they will be alive when the contract expires. Thus, it serves not only as the protection of the life cycle, but also provides the potential of accumulating cash value for the future [19] with the aim to achieve an acceptable level of financial security [20].…”

Guaranteed renewable life insurance under demand uncertainty

“…It is important to recognize other reasons for lapsing and also to investigate implications of individuals not behaving as fully rational and forward looking agents. Fang and Wu (2017) consider the effect of consumers being overconfident about their bequest motives or mortality rates in the presence of a life settlement market. Gottlieb and Smetters (2019) provide evidence that a majority of observed lapses are due to individuals either forgetting to pay premiums or underestimating the need for money in the future.…”

The effect of life insurance settlement on insurance market and consumer welfare

“…Using the data of 7,164 policyholders, Januário and Naik (2013) empirically find that when settlement is allowed, surrender value increased by up to four times. Fang and Wu (2020) state that life settlement corrects the biased belief of policyholders over their liquidity and mortality risk. Furthermore, under the assumption that the positive liquidity cost is incurred only to the insurer, Hong (2019) finds that the increase in welfare comes from both the increase in insurance demand and the cost reduction of surrender due to settlement.…”