Alexandru Barbu - Job Market Paper

Ex-Post Loss Sharing In Consumer Financial Markets

(Revise and Resubmit, Journal of Finance)

Winner, BlackRock Applied Research Award, 2021

Winner, CEPR TFI Household Finance Best Paper Award, 2021

Winner, European Economic Association Econ Job Market Best Paper Award, 2021

Winner, Eastern Finance Association Doctoral Student Best Paper Award, 2022

Winner, Western Finance Association Best Paper Award, 2023

Finalist, AQR Asset Management Institute Fellowship Award, 2021

JOB MARKET PAPER

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.

Presented at: Columbia Business School, Goethe University, Indiana Kelley, INSEAD, London Business School, Rochester Simon, UNC Kenan-Flagler, University of Wisconsin Madison, UT Austin, UT Rotman, FDIC, FED Board, the American Finance Association, Eastern Finance Association, Midwest Finance Association, NBER Insurance Meeting, Northern Finance Association, SFS Cavalcade, Western Finance Association, CEPR European Conference on Household Finance, Chicago Booth Conference on Empirical Finance, Colorado Finance Summit, Dauphine Finance PhD Workshop, ERMAS, INSEAD Finance Symposium, Nova Finance PhD Final Countdown, Princeton Young Economist Symposium, Queen Mary Finance PhD Workshop, Rome Junior Finance, Transatlantic Doctoral Conference, UT Austin PhD Symposium, and the Wharton Inter Finance PhD Seminar

Paper in a few charts

Variable annuities have turned deeply in the money after the financial crisis. The avg. customer would be $25,000 better off holding on the contract than giving it away.

Over the last decade, policyholders gave up more than $430Bn in variable annuities in exchange for newer and less generous policies.

The more generous policies got exchanged more.

I build a structural model of consumer exploitation in insurance markets to pin down a) the share of unsophisticated consumers b) the value transfers from consumers to insurers c) the reputational costs faced by firms.