Risk Management, Product Offerings, and Consumer Surplus: Evidence from the Insurance Industry

Authors

Cameron Ellis, University of Iowa - Department of FinanceFollow
Andrew Ellul, Indiana University - Kelley School of Business - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); - Centre for Studies in Economics and Finance (CSEF)Follow
Chotibhak Jotikasthira, Southern Methodist University (SMU) - Finance DepartmentFollow
Jianren Xu, University of North TexasFollow

Publication Date

3-11-2025

Abstract

We study the causal impact of enterprise-wide risk management (ERM) — designed to move firms away from a "siloed'" structure — on product decisions and consumer surplus. Exploiting the staggered rollout of an industry-wide ERM mandate in the insurance sector, we analyze life insurers’ offerings of annuities, which now account for nearly 70% of their premium revenues. We find that insurers respond by reducing risky guarantees, raising fees on the riskiest products, and shifting from traditional variable annuities toward index-linked products that provide natural hedges. To examine mechanisms and welfare outcomes, we develop a structural model that links consumer demand with multi-product supply. The ERM mandate imposes regulatory costs and corrects firms’ misperceptions about guarantee risk and cross-product risk interactions. Higher marginal costs for risky guarantees raise equilibrium prices and decrease their offerings, leading to substantial losses in consumer surplus. Overall, ERM reshapes insurers’ product strategies and risk exposures, enhancing financial stability but at a cost to consumers.

Document Type

Article

Keywords

Enterprise Risk Management, Variable Annuities, Index-Linked Annuities, Risk Management, G22, G28, G32, G11

Disciplines

Finance

DOI

10.2139/ssrn.5160872

Source

SMU Cox: Finance (Topic)

Language

English