Finance seminar - Professor Andrew Ellul - Indiana University

A seminar by Professor Andrew Ellul from Indiana University

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

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.

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