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Information Cost, Broker Compensation, and Collusion in Insurance Markets

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  • Annette Hofmann/Martin Nell

Abstract

We 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.

Suggested Citation

  • Annette Hofmann/Martin Nell, 2011. "Information Cost, Broker Compensation, and Collusion in Insurance Markets," Schmalenbach Business Review (sbr), LMU Munich School of Management, vol. 63(3), pages 287-307, July.
  • Handle: RePEc:sbr:abstra:v:63:y:2011:i:3:p:287-307
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    Keywords

    Collusion; Insurance Market; Intermediation.;

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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