Selected Working Papers
6. "Modeling and Forecasting Mortality Projections" (with Daniel Bauer) [working paper]
Unlike conventional approaches to modeling and forecasting mortality, this paper considers the stochastic evolution of mortality projections rather than realized mortality rates. Relying on a time series of age-specific mortality forecasts, we demonstrate how a Gaussian specification of the dynamics immediately yields non-parametric and factor-based forecasting approaches. Moreover, we discuss parametric mortality surface models that enforce and exploit the constraints originating from the interpretation as forecasts. Our approach resolves deficiencies of prediction errors in future life expectancy estimates based on conventional mortality models, and is therefore particularly well-suited for applications where demographic uncertainty in the longer run is relevant.
5. "The Efficiency of Voluntary Risk Classification in Insurance Markets" (with Keith J. Crocker) [working paper]
It has been established that categorical discrimination based on observable characteristics such as gender, age, or ethnicity enhances efficiency. We consider a different form of risk classification where there exists some costless yet imperfectly informative test on risk types, with the test outcome unknown to the agents ex-ante. We show that a voluntary risk classification where agents are given the option to take the test always increases efficiency compared with no risk classification. Moreover, voluntary risk classification also Pareto dominates the regime of compulsory risk classification in which all agents are required to take the test.
4. "The Economics of a Secondary Market for Variable Annuities" (with Thorsten Moenig) [working paper]
This article demonstrates that a secondary market for U.S. variable annuity policies may be immediately welfare-enhancing and Pareto-improving, irrespective of the level of control that insurers exert over it. Our model reflects relevant market frictions—here, the product’s tax benefits—that produce differing valuation perspectives for the three parties involved: the insurer, the original policyholder, and a third-party investor. This allows for policy transfers that benefit all parties simultaneously, including the insurer. We illustrate our insights first with a theoretical two-period model, followed by an empirically calibrated numerical analysis. Our numerical results suggest a best-estimate total welfare gain of 2.6% of the initial investment amount under the optimal secondary-market structure.
3. "Product market competition and corporate demand for insurance" (with Hae Won Jung and Zhiyong Liu) [working paper]
We analyze the corporate demand for insurance under duopoly by allowing for different degrees of product market competition. The more competitive a product market, the more likely that firms operating in the market will acquire insurance and the higher the insurance coverage that firms will choose. This holds true regardless of whether firms are risk neutral or risk averse. Firms covered by insurance commit themselves to taking a more aggressive output stance against their competitors. The strategic gain from insurance coverage is stronger when firms perceive less sensitive price movement in response to their output increase (i.e. a more competitive product market), thereby leading to a positive relation between insurance usage and the intensity of product market competition. We provide robust support for the model in an empirical analysis of reinsurance purchases by United States property and liability primary insurers.
2. "Asymmetric Information in Secondary Insurance Markets: Evidence from the Life Settlement Market" (with Daniel Bauer and Jochen Russ) [working paper]
We use data from a large US life expectancy provider to test for asymmetric information in the secondary life insurance—or life settlement—market. We compare realized lifetimes for a subsample of settled policies relative to all (settled and non-settled) policies, and find a positive settlement-survival correlation indicating the existence of informational asymmetry between policyholders and investors. Estimates of the “excess hazard” associated with settling show the effect is temporary and wears off over approximately eight years. This indicates individuals in our sample possess private information with regards to their near-term survival prospects and make use of it, which has economic consequences for this market and beyond.
1. "On the Economics of Life Settlements" (with Daniel Bauer)
Life settlements provide the possibility for individuals to convert their life insurance policies into cash in a secondary market transaction. Hence, this additional option is welcome from current policyholders’ point of view, but the reasons for the attractiveness to financial investors as well as the equilibrium impacts on life insurers and future policyholders are not immediately clear.
This paper presents a model to analyze and explain the details of life settlement transactions. Moreover, we investigate the potential welfare effects of a secondary life insurance market. One of our key findings is that although a perfect market for life settlements could be welfare-enhancing, high fixed costs prevailing in these transactions may alleviate or even invert this effect.