What does a life insurer need to consider with regard to product development and a secondary market?
The life insurance industry did not anticipate the development of this market and, as such their pricing did not contemplate the resulting experience, primarily as it relates to persistency and persistency-related mortality antiselection. Lapse assumptions usually drive the price down on most products – especially on newer product designs – and if a product is resold in the secondary market, it will remain inforce. While policyholders have the option to lapse, insurers have some latitude to change assumptions once a product has gone to market, but only on an entire class of business. If a product is used in a very different way than anticipated at the time pricing assumptions were set, it exposes an insurer to arbitrage. Going forward, insurers have the ability to recognize the use of life settlements and its implications with respect to persistency. If an insurer were to offer a liquidity option directly to their policyholder, the investment duration would shorten considerably. In a s
