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Adverse Selection in Secondary Insurance Markets: Evidence from the Life Settlement Market

3 May 2016 at 12:00 PM - 1:00 PM

Room 207, Campus on Viale Romania, 32

Speaker: Daniel Bauer, Georgia State University

With Jochen Russ and Nan Zhu)

Abstract: We use data from a large US life expectancy provider to test for asymmetric information in the secondary life insurance—or life settlement—market. We compare realized lifetimes for a sub-sample of settled policies relative to the entire sample, and we find a significant difference indicating the existence of informational differences between policyholders and life settlement companies. We further show that the informational advantage is temporary and wears off over approximately seven years. We argue this is in line with adverse selection on an individual’s survival prospects, which has economic consequences for the life settlement market and beyond.