Intermediation and (Mis-)Matching in Insurance Markets-Who Should Pay the Insurance Broker?

• Published in: The Journal of risk and insurance Vol. 80; no. 2; pp. 329 - 350
• Main Authors: Focht, Uwe, Richter, Andreas, Schiller, Jörg
• Format: Journal Article
• Language: English
• Published: Malden, USA Blackwell Publishing Inc 01.06.2013; Wiley Periodicals, Inc; American Risk and Insurance Association, Inc; Blackwell Publishing Ltd
• Subjects: Adverse selection; Analysis; Bans; Brokers; Business insurance; Compensation; Consumer economics; Consumers; Distribution costs; Employee insurance; Financial intermediation; Financial risk; Insurance agents & brokers; Insurance brokers; Insurance companies; Insurance exchanges; Insurance industry; Insurance markets; Insurance providers; Liability insurance; Life insurance; Management; Policyholders; Product lines; Profitability; Studies; Underwriting; United States; United States > US
• ISSN: 0022-4367; 1539-6975
• DOI: 10.1111/j.1539-6975.2012.01475.x

This article addresses the role of independent insurance intermediaries in markets where matching is important. We compare fee-based and commission-based compensation systems and show that they are payoff equivalent if the intermediary is completely honest. Allowing for strategic behavior, we discuss the impact of remuneration on the quality of advice. The possibility of mismatching gives the intermediary substantial market power, which will not translate into mismatching if consumers are rational. Furthermore, we offer a rationale for the use of contingent commissions and address whether or not the ban of any commission payments is an appropriate market intervention.