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The Economics of Insurance Intermediaries

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  • J. David Cummins
  • Neil A. Doherty
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    Abstract

    This article analyzes the economic functions of independent insurance intermediaries (brokers and independent agents), focusing on the commercial property-casualty insurance market. The article investigates the functions performed by intermediaries, the competitiveness of the market, the compensation arrangements for intermediaries, and the process by which policies are placed with insurers. Insurance intermediaries are essentially market makers who match the insurance needs of policyholders with insurers who have the capability of meeting those needs. Intermediary compensation comprises premium-based commissions, expressed as a percentage of the premium paid, and contingent commissions based on the profitability, persistency, and/or volume of the business placed with the insurer. Empirical evidence is provided that premium-based and contingent commissions are passed on to policyholders in the premium. However, contingent commissions can enhance competitive bidding by aligning the insurer's and the intermediary's interests. This alignment of interests gives insurers more confidence in the selection of risks and thus helps to break the "winner's curse" and encourages insurers to bid more aggressively. Independent intermediaries also help markets operate more efficiently by reducing the information asymmetries between insurers and buyers that can cause adverse selection. Copyright The Journal of Risk and Insurance, 2006.

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    Bibliographic Info

    Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

    Volume (Year): 73 (2006)
    Issue (Month): 3 ()
    Pages: 359-396

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    Handle: RePEc:bla:jrinsu:v:73:y:2006:i:3:p:359-396

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    Cited by:
    1. Inderst, Roman & Ottaviani, Marco, 2012. "How (not) to pay for advice: A framework for consumer financial protection," Journal of Financial Economics, Elsevier, vol. 105(2), pages 393-411.
    2. Martina Eckardt & Solvig Räthke-Döppner, 2010. "The Quality of Insurance Intermediary Services-Empirical Evidence for Germany," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(3), pages 667-701.
    3. Alma Cohen & Peter Siegelman, 2009. "Testing for Adverse Selection in Insurance Markets," NBER Working Papers 15586, National Bureau of Economic Research, Inc.
    4. Parente, Ronaldo & Choi, Byeongyong Paul & Slangen, Arjen H.L. & Ketkar, Sonia, 2010. "Distribution system choice in a service industry: An analysis of international insurance firms operating in the United States," Journal of International Management, Elsevier, vol. 16(3), pages 275-287, September.
    5. Dominique Demougin & Oliver Fabel & Christian Thomann, 2009. "Implicit vs. Explicit Incentives: Theory and a Case Study," CESifo Working Paper Series 2645, CESifo Group Munich.
    6. Focht, Uwe & Richter, Andreas & Schiller, Jörg, 2009. "Intermediation and matching in insurance markets," FZID Discussion Papers 04-2009, University of Hohenheim, Center for Research on Innovation and Services (FZID).

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