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Hanming Fang - One of the best experts on this subject based on the ideXlab platform.
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Life Insurance and Life settlement markets with overconfident policyholders
2020Co-Authors: Hanming FangAbstract: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. 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.
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Life Insurance and Life settlement markets with overconfident policyholders
2017Co-Authors: Hanming FangAbstract: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.
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why do Life Insurance policyholders lapse the roles of income health and bequest motive shocks
2012Co-Authors: Hanming Fang, Edward KungAbstract:Previous research has shown that the reasons for lapsation have important implications regarding the effects of the emerging Life settlement market on consumer welfare. We present and empirically implement a dynamic discrete choice model of Life Insurance decisions to assess the importance of various factors in explaining Life Insurance lapsations. In order to explain some key features in the data, our model incorporates serially correlated unobservable state variables which we deal with using posterior distributions of the unobservables simulated from Sequential Monte Carlo (SMC) method. We estimate the model using the Life Insurance holding information from the Health and Retirement Study (HRS) data. Counterfactual simulations using the estimates of our model suggest that a large fraction of Life Insurance lapsations are driven by i.i.d choice specific shocks, particularly when policyholders are relatively young. But as the remaining policyholders get older, the role of such i.i.d. shocks gets smaller, and more of their lapsations are driven either by income, health or bequest motive shocks. Income and health shocks are relatively more important than bequest motive shocks in explaining lapsations when policyholders are young, but as they age, the bequest motive shocks play a more important role. We also suggest the implications of these findings regarding the effects of the emerging Life settlement market on consumer welfare.
Laura Ballotta - One of the best experts on this subject based on the ideXlab platform.
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a levy process based framework for the fair valuation of participating Life Insurance contracts
2005Co-Authors: Laura BallottaAbstract:The paper develops suitable valuation techniques for a with-profit/unitized with profit Life Insurance policy providing interest rate guarantees, when a jump-diffusion process for the evolution of the underlying reference portfolio is used. Focus is on the mispricing generated by the misspecification of a jump-diffusion process for the underlying asset as a pure diffusion process, and to which extent it affects the profitability and the solvency of the Life Insurance company issuing these contracts.
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a levy process based framework for the fair valuation of participating Life Insurance contracts
2005Co-Authors: Laura BallottaAbstract:In this communication, we develop suitable valuation techniques for a with-profit/unitized with profit Life Insurance policy providing interest rate guarantees, when a jump-diffusion process for the evolution of the underlying reference portfolio is used. Particular attention is given to the mispricing generated by the misspecification of a jump-diffusion process for the underlying asset as a pure diffusion process, and to which extent this mispricing affects the profitability and the solvency of the Life Insurance company issuing these contracts.
Carole Bernard - One of the best experts on this subject based on the ideXlab platform.
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market value of Life Insurance contracts under stochastic interest rates and default risk
2005Co-Authors: Carole Bernard, Olivier Le Courtois, Francois QuittardpinonAbstract:The purpose of this article is to value some Life Insurance contracts in a stochastic interest rate environment taking into account the default risk of the underlying Insurance company. The participating Life Insurance contracts considered here can be expressed as portfolios of barrier options as shown by Grosen and Jorgensen [1997]. In order to price these options, the Longstaff and Schwartz [1995] methodology is used with the Collin-Dufresne and Gold- stein [2001] correction.
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Market value of Life Insurance contracts under stochastic interest rates and default risk
2005Co-Authors: Carole Bernard, Olivier Le Courtois, François Quittard-pinonAbstract:Abstract The purpose of this article is to value some Life Insurance contracts in a stochastic interest rate environment taking into account the default risk of the underlying Insurance company. The participating Life Insurance contracts considered here can be expressed as portfolios of barrier options as shown by Grosen and Jorgensen [J. Risk Insurance 64 (3) (1997) 481–503]. In order to price these options, the Longstaff and Schwartz [J. Finance 50 (3) (1995) 789–820] methodology is used with the Collin-Dufresne and Goldstein [J. Finance 56 (5) (2001) 1929–1957] correction.
Philipp Schaper - One of the best experts on this subject based on the ideXlab platform.
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under pressure how the business environment affects productivity and efficiency of european Life Insurance companies
2017Co-Authors: Martin Eling, Philipp SchaperAbstract:Deregulation and widespread economic changes have fundamentally affected the business environment of European Life Insurance companies over the last decades. We apply multi-stage data envelopment analysis to identify the impact of the changing environment on productivity and efficiency of European Life Insurance companies. Considering a sample of 970 Life Insurance companies from 14 European countries, we show that general economic, capital market, and Insurance market conditions are important drivers of efficiency. Although we find no technical change in the European Life Insurance sector, we nonetheless observe an efficiency increase in 2002–2013 that leads to an increase in total factor productivity; these trends can be explained by more challenging business conditions in the 2000s. Our results emphasize the need to control for the business environment in cross-country efficiency studies.
Francois Quittardpinon - One of the best experts on this subject based on the ideXlab platform.
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market value of Life Insurance contracts under stochastic interest rates and default risk
2005Co-Authors: Carole Bernard, Olivier Le Courtois, Francois QuittardpinonAbstract:The purpose of this article is to value some Life Insurance contracts in a stochastic interest rate environment taking into account the default risk of the underlying Insurance company. The participating Life Insurance contracts considered here can be expressed as portfolios of barrier options as shown by Grosen and Jorgensen [1997]. In order to price these options, the Longstaff and Schwartz [1995] methodology is used with the Collin-Dufresne and Gold- stein [2001] correction.
