Life insurance and life settlement markets with overconfident policyholders (Q2211484)

The paper focuses on the life settlement market, that is the secondary market for life insurance, and analyses the ways in which it involves consumer welfare, in a dynamic equilibrium model of life insurance with one-sided commitment and overconfident policyholders. After presenting the main guidelines of dynamic life insurance, considering that policyholders underestimate the probability of losing their bequest motives, the paper defines the set of equilibrium contracts without the life settlement market, as well as the settlement market with its impact on the equilibrium contracts. Then, some characteristics deriving from the settlement market context are demonstrated in relation to their welfare consequences. Moreover, the analysis is extended and developed assuming that policyholders possess private information regarding the actual or perceived probability of losing their bequest motives. In particular the results are in-depth in the following cases: insurers cannot observe the subjective or objective probability that policyholders will lose their bequest motives; insurers can include health-contingent cash surrender values in the life insurance contract; policyholders underestimate their future mortality risk. Empirical applications are discussed. Technical details and proofs are collected in Appendix.