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Incentive Contracting with an Independent Underwriter: Does It Benefit Insurers?

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  • Gao Siwei

    (Accounting, Finance and Information Systems, Eastern Kentucky University, 521 Lancaster Ave., Richmond, KY 40475, USA)

  • Plehn-Dujowich Jose M.

    (Accounting, Haas School of Business, University of California Berkeley, Berkeley, CA, USA)

Abstract

In this article, we propose a model consisting of an insurance distribution channel compensation scheme, paying special attention to the insurer’s choice of distribution system in both single-period and multi-period settings. We find that the risk factor is the key element in both the insurer’s choice of distribution channel and the distribution channel compensation scheme. The advantage of having an independent underwriter is mainly manifested in lines of business that are more risky. Our analysis suggests that a profit-sharing contingent-commission scheme serves as a risk-sharing mechanism and is especially effective with risky business lines.

Suggested Citation

  • Gao Siwei & Plehn-Dujowich Jose M., 2015. "Incentive Contracting with an Independent Underwriter: Does It Benefit Insurers?," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 9(2), pages 231-259, July.
    • Handle: RePEc:bpj:apjrin:v:9:y:2015:i:2:p:231-259:n:6
    DOI: 10.1515/apjri-2015-0005
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    References listed on IDEAS

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    1. Uwe Focht & Andreas Richter & Jörg Schiller, 2013. "Intermediation and (Mis-)Matching in Insurance Markets—Who Should Pay the Insurance Broker?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 329-350, June.
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    3. Jiang Cheng & Elyas Elyasiani & Tzu‐Ting Lin, 2010. "Market Reaction to Regulatory Action in the Insurance Industry: The Case of Contingent Commission," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(2), pages 347-368, June.
    4. Posey, Lisa L. & Tennyson, Sharon, 1998. "The coexistence of distribution systems under price search: Theory and some evidence from insurance," Journal of Economic Behavior & Organization, Elsevier, vol. 35(1), pages 95-115, March.
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