Question

A firmm purchases a life insurance contract from a sick person, then collects the payout when he dies. These types of contracts are called viatical settlements. It is the sale of a policy owner's existing life insurance policy to a third party owner for more than its cash surrender value but less than the net death benefit (Wikipedia). These markets are also referred to as reverse insurance markets. Firms have an incentive to enter into such settlements if they expect the person whose life insurance policy is being purchased to die relatively soon. If the person dies, the firm gets to collect the death benefit.

Q. Did this market suffer adverse selection?

Answer 1