Ex-Post Loss Sharing in Consumer Financial Markets

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