Life insurance and life settlement markets with overconfident policyholders

• 成果类型: Article
• 署名作者: Fang, Hanming; Wu, Zenan
• 署名单位: University of Pennsylvania; ShanghaiTech University; National Bureau of Economic Research; Peking University
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2020.105093
• 发表日期: 2020
• 关键词: life insurance; secondary market; overconfidence; intertemporal elasticity of substitution

摘要

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. In our model, policyholders may lapse their life insurance policies when they lose their bequest motives; however, they are overconfident in the sense that they may underestimate the probability of losing their bequest motives. We show that in the competitive equilibrium without life settlement, overconfident consumers will buy life insurance contracts with too much reclassification risk insurance for later periods. The life settlement market can impose a limit on the extent to which primary insurers can exploit overconfident consumers. We show that the life settlement market 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. Our result is robust to alternative specifications where (i) insurers cannot observe the subjective or objective probability that policyholders will lose their bequest motives; (ii) insurers can include health-contingent cash surrender values (CSVs) in the life insurance contract; and (iii) policyholders underestimate their future mortality risk. (c) 2020 Elsevier Inc. All rights reserved.