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The impact of intermediary remuneration in differentiated insurance markets

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  • Hofmann, Annette
  • Nell, Martin
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    Abstract

    This article deals with the impact of intermediaries on insurance market transparency and performance. In a market exhibiting product differentiation and coexistence of perfectly and imperfectly informed consumers, competition among insurers leads to non-existence of a pure-strategy market equilibrium. Consumers may become informed about product suitability by consulting an intermediary. We explicitly model two intermediary remuneration systems: commissions and fees. We find that social welfare under fees is first-best efficient but fees lead to lower expected profits of insurers and non-existence of a pure-strategy market equilibrium. Commissions, in contrast, cause 'overinformation' of consumers relative to minimal social cost, but yield a full-information equilibrium in pure strategies associated with higher expected profits of insurers. This might explain why intermediaries are generally compensated by insurers. --

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    Bibliographic Info

    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 22.

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    Date of creation: 2008
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    Handle: RePEc:zbw:hzvwps:22

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    Related research

    Keywords: product differentiation; intermediation; insurance oligopoly;

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    References

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    1. H S E Gravelle, 1991. "The Welfare Economics of Controls on Brokers' Commissions*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 16(1), pages 3-19, January.
    2. Martin J Osborne & Carolyn Pitchik, 1985. "Equilibrium in Hotelling's Model of Spatial Competition," Department of Economics Working Papers 1985-02, McMaster University.
    3. Sass, Tim R & Gisser, Micha, 1989. "Agency Cost, Firm Size, and Exclusive Dealing," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 32(2), pages 381-400, October.
    4. Polo, Michele, 1991. "Hotelling Duopoly with Uninformed Consumers," Journal of Industrial Economics, Wiley Blackwell, Wiley Blackwell, vol. 39(6), pages 701-15, December.
    5. Mattias K. Polborn, 1998. "A Model of an Oligopoly in an Insurance Market," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 23(1), pages 41-48, June.
    6. Hugh Gravelle, 1993. "Product Price and Advice Quality: Implications of the Commission System in Life Assurance," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 18(1), pages 31-53, June.
    7. d'Aspremont, C & Gabszewicz, Jean Jaskold & Thisse, J-F, 1979. "On Hotelling's "Stability in Competition"," Econometrica, Econometric Society, Econometric Society, vol. 47(5), pages 1145-50, September.
    8. 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, Elsevier, vol. 35(1), pages 95-115, March.
    9. Schultz, Christian, 2004. "Market transparency and product differentiation," Economics Letters, Elsevier, Elsevier, vol. 83(2), pages 173-178, May.
    10. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
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    Cited by:
    1. Pohl, Philipp, 2008. "Einfluss der Balanced-Scorecard-Werteparameter auf den Unternehmenswert in einem Regressionsmodell am Beispiel der Versicherungsbranche," Working Papers on Risk and Insurance 23, University of Hamburg, Institute for Risk and Insurance.
    2. 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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