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

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 the average difference between realized lifetimes and estimated life expectancies 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 five to six years. We argue this is in line with adverse selection on an individual’s condition, which has important economic consequences for the life settlement market and beyond. JEL classification: D12; G22; J10