Aspects of Insurance, Intermediation and Finance*
This paper is concerned with the role of the insurance company as a financial intermediary which offers securities to uninformed retail investors. The search costs of retail investors cause the demand for the securities offered by intermediaries to be inelastic, making possible an intermediary spread, the difference between the returns on primary securities and the rates offered on the secondary securities sold by intermediaries. It is argued that the intermediary spread is economically significant, and a simple model of its determination is offered: the spread is shown to be an increasing function of interest rates. The bonus policy of life insurance companies is analyzed and is shown to be inefficient under simple assumptions about asset returns. The Geneva Papers on Risk and Insurance Theory (1993) 18, 7–30. doi:10.1007/BF01125821
Volume (Year): 18 (1993)
Issue (Month): 1 (June)
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