The Economics of Life Insurance Settlement

We investigate the effects of the settlement market of life insurance policies on the monopolistic insurer's profit and social welfare. We assume that consumers differ only in their liquidity needs, and that the insurer cannot discriminate consumers based on their liquidity needs. When the settlement market incurs no costs, we find that the existence of the settlement market enhances social welfare. The welfare improvement comes not only from the saved costs, but also from the increased consumer bases. When the settlement market incurs costs, the results are complicated. Interestingly, social welfare can be improved, even if the settlement market is inefficient. However, it is also possible that social welfare is lowered even if the settlement market is efficient. The bottom line is that the introduction of a settlement market, regardless of its efficiency, changes the benefits and costs to the insurer's pricing strategy. Since the insurer does not fully internalize the consumer welfare, the profit maximizing strategy may fail to maximize the social welfare. Finally, the life settlement market is active as long as it is more efficient, regardless of its impact on social welfare.