Finance Seminar Andrew Ellul
The paper studies how enterprise-wide risk management (ERM) mandates change what insurers sell, using the staggered state-by-state rollout of the ORSA regulation in the US life insurance industry. After ORSA takes effect, insurers cut back on traditional variable annuities with rich guarantees, raise fees on the riskiest products, and shift toward index-linked annuities that hedge more naturally against their existing liabilities. A structural model the authors build shows insurers had been underpricing the hedging value across their product lines before the mandate; correcting that misperception raises prices more than it improves product design, and consumer surplus in the annuity market falls substantially.
ORSA’s effect came less from discouraging risk-taking outright and more from correcting a specific blind spot: insurers had been underpricing how much their product lines hedge each other. Once that got fixed, prices rose and guarantees shrank.
Takeaway: Regulating for financial stability came at a real cost to the people buying these products.