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Intermediation and matching in insurance markets

  • Focht, Uwe
  • Richter, Andreas
  • Schiller, Jörg

This paper addresses the role of independent insurance intermediaries in markets where matching is important. A controversial matter in the discussion concerning insurance intermediation is the issue of compensation customs and how the latter affect prices, rents and advice quality in insurance markets. This work compares a fee-based with a commission-based system. We show that in a situation with a non-strategic intermediary both remuneration systems are payoff-equivalent. In a second step, allowing for strategic behavior, we discuss the impact of remuneration on the quality of advice. The analysis shows that the possibility of mismatching can provide the intermediary with substantial market power which however does not translate into mismatching as long as consumers have rational expectations. We offer a rationale for the use of contingent commissions. In addition, this paper addresses whether or not the recent ban of any commission payments as introduced in countries such as Denmark and Finland is an appropriate market intervention.

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Paper provided by University of Hohenheim, Center for Research on Innovation and Services (FZID) in its series FZID Discussion Papers with number 04-2009.

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Date of creation: 2009
Date of revision:
Handle: RePEc:zbw:fziddp:200904
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  1. d'ASPREMONT, Claude & GABSZEWICZ, Jean J. & THISSE, Jacques-François, . "On Hotelling's "Stability in competition"," CORE Discussion Papers RP 385, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Bolton, Patrick & Freixas, Xavier & Shapiro, Joel, 2007. "Conflicts of interest, information provision, and competition in the financial services industry," Journal of Financial Economics, Elsevier, vol. 85(2), pages 297-330, August.
  3. J. David Cummins & Neil A. Doherty, 2006. "The Economics of Insurance Intermediaries," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 73(3), pages 359-396.
  4. Varian, Hal R, 1980. "A Model of Sales," American Economic Review, American Economic Association, vol. 70(4), pages 651-59, September.
  5. Christian Schultz, 2002. "Market Transparency and Product Differentiation," CIE Discussion Papers 2002-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
  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. Regan, Laureen & Tennyson, Sharon, 1996. "Agent Discretion and the Choice of Insurance Marketing System," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 637-66, October.
  8. Schultz, Christian, 2005. "Transparency on the consumer side and tacit collusion," European Economic Review, Elsevier, vol. 49(2), pages 279-297, February.
  9. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
  10. Hofmann, Annette & Nell, Martin, 2008. "The impact of intermediary remuneration in differentiated insurance markets," Working Papers on Risk and Insurance 22, University of Hamburg, Institute for Risk and Insurance.
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