A Study On Mode Selection And Pricing Method Of Life Settlement

In the 1980 s,the insurance market of the United States had been fully developed.AIDS was rampant in the country and became one of the most serious fatal diseases.The patients had to pay a high medical cost to stay alive.Most HIV/AIDS sufferers cannot afford such huge expense,so they chose to sell their life insurance policies to the third party.This was the origin of the life settlement business in the US.The life settlement companies were established and the life policy investors provided a large amount of capital for infected policy holders which had greatly contribute to their survival.On January 8,2018,the former China Insurance Regulatory Commission(CIRC)issued The Draft Measures for the Pilot Management of Life Settlement Business to solicit opinions from the society on the development of life settlement business,indicating the start point of China’s life settlement business.Up to now,China has not entered the stage of actual operation of the life settlement pilot program,which still remains under discussion.Based on the experience of life settlement business in the United States,this study introduces some details of the standard life settlement mode(LS mode)and retained death benefit mode(RDB mode),and analyzes the pricing mechanism of the two modes.We also analyze the policy holder’s optimal choice strategy,that is,which group of policy holders should choose to hold the policy,surrender or transfer the policy.If they have decided to choose to transfer the policy,which mode they should choose.It is assumed that the policy holder bears a whole-life life insurance.In order to ensure the accuracy of the result of the policyholder’s selection strategy,we first prices the insurance products held by the policyholder,and calculates the cash value of surrender at different ages of the insured.Our paper is organized as follows:Chapter One is the introduction,which mainly expounds the background,motivation and methodology of this paper,and proposes the possible contribution and insufficiency of this research.In addition,we review the related literature and summarizes some existent theories on this topic.Chapter Two provides a general overview of the life settlement.First we expound the specific process of the life settlement transaction and the participants involved in the life settlement business.We listed out four characteristics of life settlement investment and the impact of the existence of life settlement on insurance companies.Then we discuss the similar practices to life settlement,such as the policy loan,the reduction settlement,the surrender of the policy and the accelerated death benefit.We also introduce two strategies of secondary insurance market,namely premium financing and life settlement strategy.Then it compares the specific transaction flow of LS mode and RDB mode.Finally we study the indirect operation mode and broker system of life settlement in the United States,some legal issues related to life settlement in China,and discusses the regulation of the main participants of life settlement transaction.Chapter Three includes the pricing method and calculations of life settlement.After deriving the price and cash value of insurance products,the pricing formulas and results of LS mode and RDB mode of life settlement were compared.The pricing process of the LS mode,the analysis is based on the fixed life expectancy and the pricing based on mortality separately.Finally,the welfare analysis of policy holders and life settlement investors is performed through the calculation on the basis of assumptions.Chapter Four analyzes the choice of policy strategy for policyholders under the life settlement.The first section evaluates the policyholder’s decision between holding the policy and selling the policy,and the policyholder’s decision between surrender and selling the policy.The second section elaborates on the information asymmetry in the life settlement market--since the insured tends to have a better understanding of their physical conditions and has different predictions of their remaining life.Based on this assumption,this paper studies the problem that the insured should choose LS mode or RDB mode.The last chapter is the conclusions and suggestions.The pricing methods of the LS mode and RDB mode in the case of expected residual life and the case based on mortality are summarized.We also compare the choice of policy holders between surrender,holding and transferal of the policy,and evaluates the choice of LS mode and RDB mode to give reasonable suggestions to policy holders.Finally,it is suggested that China should improve the expected residual life prediction system and develop the life settlement RDB mode.Some possible contribution of this paper includes: ⑴This paper calculates the price and cash value of insurance products under the practical assumptions,which serves as the data basis for the pricing and benefit analysis of the two life settlement modes,rather than using the assumed data.⑵Our study compares the LS mode and RDB mode of life settlement in details,studies the pricing of the two modes of life settlement,and display the calculation results according to our hypotheses.⑶We studies the selection strategy of policyholder between surrender,holding and transferal of the policy,and the optimal choice between LS mode and RDB mode for life settlement,and the calculation result is provided according to the hypothesis.