A Review of Life Insurance’s Secondary Market

Abstract

The secondary market for life insurance policies emerged to provide financial relief for terminally ill patients through viatical settlements. Over time, it expanded to include life settlements for seniors and individuals with chronic conditions. This growth was driven by demographic shifts and increased life expectancies.

This paper discusses the historical evolution of the secondary market, the types of transactions involved, and the market dynamics. It explores the benefits and challenges faced by policyholders, insurance companies, and investors. For policyholders, the market offers enhanced liquidity and fair compensation. However, it also requires insurers to adjust premium structures and manage adverse selection. Investors benefit from high returns and risk diversification, but they are also exposed to longevity risk, liquidity risk, return volatility, and regulatory changes. The study highlights the complexities of asymmetric information and emphasizes the need for sophisticated actuarial models and robust regulatory frameworks to ensure market stability and sustainability.