Alexandru Barbu - Research

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

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

Working Papers

The Evolution of Insurance Markets: Insurance Provision and Capital Regulation (with David Humphry and Ishita Sen)

The insurance sector has undergone significant changes in risk regulation in recent decades. This paper examines how risk-based capital regulation impacts the evolution of insurance product markets. Risk regulation affects insurance product markets through both supply, from insurers adjusting, and demand sides, from households limiting purchases from high risk insurers. We exploit a natural experiment, the adoption of risk-based regulation in the UK, to distinguish between supply and demand effects. We do so exploiting a first-of-a-kind granular database derived from regulatory stress tests detailing insurers' risk exposures across key factors. We show that the insurance sector is increasingly moving away from its traditional role of insuring against a range of different risks to merely serving as a pass-through for investments into mutual funds. We provide causal estimates of the shift in insurers' product composition and market concentration. Furthermore, we explore how differences in regulatory environments across countries contribute to variations in insurance portfolios, suggesting that stricter regulations correlate with reduced ownership of traditional insurance products, particularly among lower-income individuals. This research underscores the complex interplay between regulatory frameworks and the insurance market landscape.

Presented at: American Finance Association*, Bank of England*, BIS (scheduled), Bocconi, CEPR Workshop in Household Finance, Chicago Macro Finance Research Program*, European Finance Association, INSEAD, London Business School*, Frankfurt School of Finance and Management, Georgetown

Employee Forgivable Loans (with Yiran Wang)

We highlight the role of conflicted compensation practices in driving the quality of expert advice. We document how a large class of high-skilled client-facing professionals (financial advisors, insurance agents, doctors) have loss framed compensation contracts. The typical recruitment package in these industries is an upfront bonus structured as a loan that is forgivable based on continued tenure and performance but repayable upon bad performance, often under onerous terms. Focusing on the US securities industry, we show how these forgivable loans are pervasive, are large (up to $250,000 per broker), long dated (up to 14 years) and are undisclosed to customers and credit bureaus. Having spent the loan proceeds, brokers are systematically underprepared to face the consequences of non-forgivenesss. Ex-ante, forgivable loans are anticompetitive as they advantage large firms and act as shadow non-competes preventing broker mobility towards entrepreneurship and smaller firms. Ex-post, forgivable loans are the largest source of financial advisor delinquencies, and are conflicted, as advisors relax financial constraints by committing misconduct. Using quasi-natural variation in forgivable loan enforcement across arbitration forums, we causally link retention and misconduct to loan delinquency, providing a novel link between expert advisor compensation, competition in the labor markets, risk management and consumer protection.

Presented at: INSEAD Finance Symposium

Hedging through Product Design (with Ishita Sen and Nuno Clara)

We document a large shift in the market for market risk insurance. Traditionally, insurers sell market risk protection to households via retirement savings products with minimum return guarantees. Frictions in hedging aggregate risk means insurers retain risk exposures inducing financial fragility. Over the last few years, insurance companies have sold more than $200Bn in long-dated short put products, effectively buying downside risk protection from households. Protection flows from households with the greatest risk bearing capacity to insurers that are most constrained. We show how hedging in the product markets has large advantages over hedging in financial markets and improves the financial stability of the insurance sector. We discuss implications for pricing, hedging, asset allocation and the allocation of aggregate risk in the economy

Presented at: CEPR European Summer Symposium in Financial Markets, HEC, INSEAD, University of St Gallen

Procyclical Asset Management and Bond Risk Premia (with Christoph Fricke and Emanuel Moench)

Deutsche Bundesbank Discussion Paper, ESRB Discussion Paper, VoxEU Column, In Press

We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers.

Presented at: BIS, Bundesbank Spring Conference, CEPR CAFFE Seminar, Copenhagen Business School, ECB, European Economic Association, ESSEC, Frankfurt School of Finance, University of St Gallen, Swiss Winter Conference in Financial Intermediation, Transatlantic Doctoral Conference, Vienna University, Western Economic Association

* presented by co-author

Inactive Working Papers

Inconsistent Capital Regulation (subsumed into Insurance Provision and Capital Regulation)

We use the transition in January 2016 from the Solvency I regulatory regime, which was heterogenous across countries in the European Union (EU), to the Solvency II regime, which harmonizes insurance regulation across countries, to understand the impact of heterogenous insurance regulation on cross-country variation in product market outcomes and financial stability. Using variation across insurers within the same country, and across countries for the same insurance group, we show that market risk insurance via guaranteed return products is more prevalent in countries with more lax capital requirements. Moreover, we show that the interest rate exposure of insurance companies increased as interest rates declined in recent years, and this effect is more pronounced for companies with a larger share of guaranteed return products. We conclude by discussing potential determinants of differences in cross-country regulation related to pension systems, salient historical events such as insurance company failures, and political incentives to stimulate the growth of insurance markets.

Work in Progress

Rents in Insurance

Misconduct Beta