Testing for Adverse Selection in Life Settlements: The Secondary Market for Life Insurance Policies

38 Pages Posted: 14 Jun 2013 Last revised: 6 Jun 2016

Afonso V. Januario

Schroders

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Date Written: July 23, 2014

Abstract

Using a large and comprehensive dataset of 9,002 life insurance policies with aggregate death benefit of $24.14 billion purchased from their original owners between 2001 and 2011, we compute the expected return on individual policies. We find that the primary determinant of the expected return on these life settlement contracts is not adverse selection relative to underlying life expectancies. Instead, we find that other economic phenomenon such as demand for insurance, increasing premium schedules, diversification of unique risks and mitigation of life expectancy estimation risk help explain the cross-sectional variation in expected returns across life settlements contracts.

Keywords: life settlements, secondary market for life insurance, adverse selection, longevity risk

JEL Classification: G20, G22, G23

Suggested Citation

Januario, Afonso V. and Naik, Narayan Y., Testing for Adverse Selection in Life Settlements: The Secondary Market for Life Insurance Policies (July 23, 2014). Available at SSRN: https://ssrn.com/abstract=2278299 or http://dx.doi.org/10.2139/ssrn.2278299

Afonso Varatojo Januario

Schroders ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

HOME PAGE: http://https://sites.google.com/site/afonsovj/

Narayan Y. Naik (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

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