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1 Regional Need Analysis of The Viatical Settlements Market GAO Xiaoting, LIU Chenzhe, ZHAO Zan

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2 Introduction

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3 Our purpose The purpose of our paper is to analyze the regional demand of the viatical (as well as life) settlements market in China. Since the development of the primary market of life insurance has not reached the identical level among different areas in China, the demand of secondary market can hardly be the same. Thus, in order to find out the best experimental unit, it is necessary to know the difference among different cities and provinces.

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4 Methodology The paper first outlines the research status of viatical and life settlements market in China. Then we use cluster analysis to classify Chinas cities and provinces into four groups according to their insurance penetration and density. We select two typical places from each group (except the second group), and then establish the regression equation for each place using the data of the aged population, medical expenses per capita and the sum of surrender value and policy loan.

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5 Methodology Since we have the regression equations for each place, then we use these equations to predict the demand of the viatical and life settlements market in the next 5 years. With the prediction, we can decide which city or province is the most suitable experimental unit.

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6 Findings After the cluster analysis considering the insurance penetration and density from 2008 to 2012, we classify cities and provinces into four groups: / (%) 1 3197.1623.785 2 1736.2561.46% 3 983.2911.7615 4 25 428.3921.89

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7 Findings We select Tianjin and Jiangsu as the representatives of the third group, and Guizhou and Guangxi the fourth group. Due to the lack of data, the regression equation of Shenzhen (the second group) is not available.

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8 Findings We use the OLS method to make the equation. The model of our equation is denotes the sum of surrender value and policy loan denotes the population beyond 65 denotes medical expenses in general hospital of inpatient per capital

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9 Equation for Beijing Using the data from 2002 to 2011,we have time series, and. The result of their ADF unit root test is : From the table, we can conclude that three series are all integrated of order one. order variable levelIntegrated of order one Two integrated of order tptptp -2.11160.2442-2.11680.0401-3.03880.0095 -3.78420.0737-4.79850.0078-5.68780.0061 -3.54400.0969-4.42530.0121-4.45020.0147

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10 Equation for Beijing Then we will use EG two-step procedure to testify whether they have cointegration. The estimated equation for Beijing is (0.1739) (2.0495) (-0.7032) Adjusted =0.660, DW=1.388 The residual series is level. Therefore these three series are co integrated and the equation is valid.

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11 Equation for Beijing The adjusted is 0.660,which indicates that the fitting effect is acceptable. We cannot tell whether there is self-correlation problem from the value of DW. Thus we use Breusch-Godfrey Serial Correlation LM Test. The result is Since, we reach the conclusion that there is no self-correlation problem.

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12 Equation for Beijing The equation Means that when remain unchanged, if increase by 1%, will increase by 1.03%; while remain unchanged, when increase by 1%, will increase by 4.38%.

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13 Equation for Shanghai Using the same method, we have the equation for Shanghai: t (2.0872) (6.4687) (-3.343) Adjusted =0.8158 DW=1.512 Since adjusted is 0.8158, the fitting effect is fair. And Breusch-Godfrey Serial Correlation LM Test indicates that there is no self-correlation problem.

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14 Equation for Shanghai The equation shows that when the medical expenses per capita remain unchanged, if the population of people beyond 65 increase by 1%, will increase by 1.85%; while remain unchanged, if increase by 1%, will increase by 3.54%.

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15 Equation for Jiangsu Using the same method, we have the equation for Jiangsu: t (1.4796) (5.4804) (-2.4334) Adjusted =0.9124 DW=1.459 Since adjusted is0.9124,the fitting effect is fair enough. And Breusch-Godfrey Serial Correlation LM Test indicates that there is no self-correlation problem.

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16 Equation for Jiangsu The equation indicates that when remain unchanged, if increase by 1%, then will increase by 2.67% ; while remain unchanged, if increase by 1%, then Y will increase by 3.14%.

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17 Equation for Tianjin Using the same method, we have the equation for Tianjin: t (-0.09589) (2.6755) (-2.4848) Adjusted =0.6982 DW=1.756 Since adjusted is0.9124,the fitting effect is fair enough. And Breusch-Godfrey Serial Correlation LM Test indicates that there is no self-correlation problem.

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18 Equation for Jiangsu The equation indicates that when remain unchanged, when increase by 1, will increase by0.0083; while remain unchanged, when increase by1, will decrease by0.0955.

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19 Results for Guizhou and Guangxi There is no co integration in time series, and as well as, and until three order differential. But that will impair equations economic meaning. Therefore, we assume that there is no link between the demand for life settlement market, population of the aged and medical expenses. The reason may lie in the fact that the primary market of life insurance is not well developed to establish the secondary market.

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20 Prediction Since we have the equations, we can use them for prediction for the next five years. The result is (million) : BeijingShanghaiTianjinJiangsu 201222318.959211346.22583178.418422158.76 201329559.691514726.11053413.486229745.39 201439212.594219161.65983610.043240015.05 201552101.914824997.46923745.722953946.59 2016 69340.969632695.374353787.60166372886.9

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21 Analysis The table indicates that the demand for viatical(life) settlement market will be growing in increasing speed. Thus establishing viatical(life) settlement market in China is necessary. From the table, we can see that in 2016 the demand of Jiangsu has the largest scale. The second is Beijing. Then Shanghai.

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22 Analysis Since Jiangsu has the largest demand, it is reasonable that we choose Jiangsu as the best experimental unit. However, considering other factors, Beijing may be the ideal choice. In 2016, the demand of Beijing is 69.3 billion, while the demand of Jiangsu is 72.8 billion. The demand of Jiangsu is 5.05% larger than Beijings. So there is no big difference between these two places.

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23 Analysis Despite that two places almost have the same scale of demand, Beijing is municipality directly under the Central Government with the population of 20.19 million in 2011, while Jiangsu is a province with the population of 78.66 million. Thus the cost to establish viatical settlement market will be much lower than than in Jiangsu.

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24 Analysis Furthermore, Beijing has a much more mature insurance market with abundant insurance companies, agents and brokers. Till 2011, the total number of head quarters of insurance companies in Beijing is 95. And the total numbers of agents and brokers in Beijing is 357. In contrast, there are only 3 head quarters of insurance companies and 148 agents and brokers in Jiangsu.

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25 Analysis Therefore, viatical or life settlement product can be sold more easily in Beijing rather than Jiangsu. So we reach the conclusion that Beijing is the best experimental unit.

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