Ex-Post Loss Sharing in Consumer Financial Markets

102 Pages Posted: 20 Apr 2022 Last revised: 19 Sep 2023

Date Written: September 19, 2023

Abstract

Insurance companies sell consumer financial products called variable annuities that combine mutual funds with minimum return guarantees over long horizons, retaining considerable market risk. I show that the guarantees embedded in variable annuities turned deeply in the money after the financial crisis. However, over the last decade, insurers removed more than $429 billion in variable annuities by having consumers exchange them into less generous products. The more generous contracts and harder to hedge guarantees got exchanged the most. Using data from a million regulatory filings and quasi-natural experiments, I uncover how insurance companies incentivize exchanges by providing conflicting incentives to the brokers servicing these policies. Raising brokers to a fiduciary standard reduces exchanges by half.

Keywords: Market Risk Insurance, Conflicts of Interest, Variable Annuities, Quasi-Natural Experiment, Forensic Finance, Risk Management, Consumer Protection

JEL Classification: G22, G24, G28, G52, G53, D14, D18

Suggested Citation

Barbu, Alexandru, Ex-Post Loss Sharing in Consumer Financial Markets (September 19, 2023). Available at SSRN: https://ssrn.com/abstract=4079524 or http://dx.doi.org/10.2139/ssrn.4079524

Alexandru Barbu (Contact Author)

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://https://www.insead.edu/faculty-research/faculty/alexandru-barbu

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