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Intermediation, compensation and tacit collusion in insurance markets

  • Focht, Uwe
  • Richter, Andreas
  • Schiller, Jörg
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    Recent events involving major insurance companies and insurance brokerage firms highlight substantial incentive problems in commercial and reinsurance markets where intermediation takes place. We show that in markets with informed as well as uninformed consumers and heterogeneous risk profiles intermediation has the potential to improve social welfare. However, since intermediation reduces insurers’ market power, incentives for tacit collusion are higher compared to markets without intermediation. A controversial matter in the discussion concerning insurance intermediation is the issue of compensation customs. Our analysis provides explanations for the counterintuitive observation that brokers are usually compensated by insurance companies. The rationale for the latter is the fact that a fee paid by uninformed consumers limits the insurers’ ability to extract rents from informed consumers.

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    File URL: http://econstor.eu/bitstream/10419/54219/1/68053413X.pdf
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    Paper provided by University of Hamburg, Institute for Risk and Insurance in its series Working Papers on Risk and Insurance with number 17.

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    Date of creation: 2006
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    Handle: RePEc:zbw:hzvwps:17
    Contact details of provider: Web page: http://www.hzv-uhh.de/

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    1. Christian Schultz, 2002. "Market Transparency and Product Differentiation," CIE Discussion Papers 2002-02, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
    2. Baye, Michael R & Cosimano, Thomas F, 1990. "Choosing Sides in Matching Games: Nash Equilibria and Comparative Statics," Economica, London School of Economics and Political Science, vol. 57(227), pages 283-93, August.
    3. Winand Emons, 1997. "Credence Goods and Fraudelent Experts," RAND Journal of Economics, The RAND Corporation, vol. 28(1), pages 107-119, Spring.
    4. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
    5. 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).
    6. Schultz, Christian, 2005. "Transparency on the consumer side and tacit collusion," European Economic Review, Elsevier, vol. 49(2), pages 279-297, February.
    7. Asher Wolinsky, 1991. "Competition in a Market for Informed Experts' Services," Discussion Papers 959, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    8. Yavas, Abdullah, 1994. "Middlemen in Bilateral Search Markets," Journal of Labor Economics, University of Chicago Press, vol. 12(3), pages 406-29, July.
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