Report
Risk management, product offerings, and consumer surplus: evidence from the insurance industry
Discussion paper series (Centre for Economic Policy Research (Great Britain)), no. 20882, Centre for Economic Policy Research
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.
Includes bibliographical references (pages 40-42).
Details
- Title: Subtitle
- Risk management, product offerings, and consumer surplus: evidence from the insurance industry
- Creators
- Cameron M EllisAndrew EllulChotibhak JotikasthiraJianren Xu
- Resource Type
- Report
- Series
- Discussion paper series (Centre for Economic Policy Research (Great Britain)); no. 20882
- Publisher
- Centre for Economic Policy Research; London
- Number of pages
- 48 pages
- Language
- English
- Date published
- 2025
- Academic Unit
- Finance
- Record Identifier
- 9985112981302771
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