Information Cost, Broker Compensation, and Collusion in Insurance Markets
AbstractWe examine the impact of intermediation on insurance market transparency and performance. In a differentiated insurance market under imperfect information, consumers can gain information about product suitability by consulting an intermediary. We analyze current broker compensation methods: commissions and fees. Although insurers’ equilibrium profits are equivalent under both systems, social welfare is always higher under a fee-for-advice system than under a commission system. Both systems offer the opportunity to increase profits via collusion. Under a commission system, collusion enables insurers to separate consumers into groups purchasing different contracts. Insurers may then extract additional rents from some consumers. This advantage can explain why brokers tend to be compensated by insurers.
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Bibliographic InfoArticle provided by LMU Munich School of Management in its journal Schmalenbach Business Review.
Volume (Year): 63 (2011)
Issue (Month): 3 (July)
Collusion; Insurance Market; Intermediation.;
Find related papers by JEL classification:
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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