People near the end of life such as the frail elderly or terminally ill often desire to sell non-liquid assets to finance current consumption. This is especially true for those with a life-threatening illness that requires expensive drug treatments. Such people are increasingly using a financial vehicle called a viatical settlement. These settlements, which first arose in the context of HIV, allow policyholders to convert their previously non-liquid life insurance policies into cash at a discount to the policies' face value. (The discount depends on life expectancy.) These transactions are becoming increasingly common among the elderly with non-HIV disease. This project will: (1) Develop an economic theory of how prices are determined: (2) Describe the viatical settlements market in states with different regulatory environments; (3) Empirically estimate economic models of market behavior using actual transaction data; and (4) Simulate the welfare implications of price regulation and changes in market structure. A unique database of actual viatical settlement transactions will be compiled using annual reports of viatical companies filed with insurance regulators in 26 states during the period 1995 to 2001. The empirical analysis will depend on an economic theory of how prices are determined in the viatical settlements market. A key implication of the theory is that prices in this market may change either due to changes in the market power of firms in this market or due to changes in the market's expectations about medical breakthroughs that increase the longevity of the terminally ill or elderly. Price changes due to changes in market power are welfare reducing, whereas changes due to increased optimism about medical advances do not entail a welfare loss as the lower price just reflects the lower actuarial value of the life insurance (as one expects the policyholder will die later). The economic models will be estimated using the transaction data to determine whether recent price changes reflect increases in market power or increased market optimism about medical breakthroughs. This project will also estimate the magnitude of welfare gain (or loss) due to imposition of price regulations mandating that consumers receive at least a certain percentage of the face value of a life insurance policy. Price regulations might increase consumer welfare by increasing the prices received by consumers, but if these price floors are set too high, they might do more harm by blocking mutually beneficial life insurance sales. We will use a dynamic micro-simulation model to simulate the welfare implications of different price regulations. We will calibrate this model using our transaction data and a nationally representative sample of HIV+ adults with life insurance.
| Bhattacharya, Jay; Goldman, Dana; Sood, Neeraj (2009) MARKET EVIDENCE OF MISPERCEIVED MORTALITY RISK. J Econ Behav Organ 72:451-462 |
