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: Suggested Citation