Ex-Post Loss Sharing in Consumer Financial Markets

Category: Finance Brown Bag Seminar
When: 24 November 2021
, 14:00
 - 15:00
Where: online
Speaker: Alexandru Barbu (London Business School)

Title: 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 policies were exchanged the most. I develop a structural model of consumer exploitation in insurance markets that pins down the degree of consumer inattention and the reputational costs faced by firms. I find that 20% of consumers neglect important contract characteristics, insurers pay 13 cents in reputational costs per dollar exploited, while moving to a fiduciary standard raises reputational costs by a further 8 cents per dollar and reduces exchanges by half.