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

Speaker: Daniel Bauer, Georgia State University

Date & Time:

Thursday, May 8, 2014
7:30 PM - 8:30 PM

Location:

Owens Science Center's 3M Auditorium (OWS 150)

Abstract: We use data from a life expectancy provider to test for asymmetric information in the secondary life insurance market. We compare the difference between realized and estimated life expectancy estimates for a sub-sample of settled policies relative to the entire sample. We find a significant positive difference indicating private information on mortality prospects. Using non-parametric estimates for the excess mortality and survival regressions, we show that the informational advantage is temporary and wears off over four to five years. We argue this is in line with adverse selection on an individual’s condition. Calculations within a utility-based model for the transactions illustrate the economic significance of the effect.

Biographical information: Daniel Bauer is an assistant professor of risk management and insurance in the Robinson College of Business at Georgia State University. He specializes in the development of new mathematical models for the valuation and risk management of insurance products and insurance-linked securities. Other interests include the economics of annuitization and computational finance.

Professor Bauer received his doctorate in Mathematics from Ulm University, from where he also holds a Diploma in Economical Mathematics. Furthermore, he obtained an M.S. degree from San Diego State University where he studied Statistics as a Fulbright scholar. He is among the first junior members of the German Society for Actuarial and Financial Mathematics and an immediate candidate of the German Society of Actuaries.

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