The Economics of Insurance Intermediaries

Abstract

This article analyzes the economic functions of independent insurance intermediaries (brokers and independent agents), focusing on the commercial property-casualty insurance market. The article investigates the functions performed by intermediaries, the competitiveness of the market, the compensation arrangements for intermediaries, and the process by which policies are placed with insurers. Insurance intermediaries are essentially market makers who match the insurance needs of policyholders with insurers who have the capability of meeting those needs. Intermediary compensation comprises premium-based commissions, expressed as a percentage of the premium paid, and contingent commissions based on the profitability, persistency, and/or volume of the business placed with the insurer. Empirical evidence is provided that premium-based and contingent commissions are passed on to policyholders in the premium. However, contingent commissions can enhance competitive bidding by aligning the insurer's and the intermediary's interests. This alignment of interests gives insurers more confidence in the selection of risks and thus helps to break the "winner's curse" and encourages insurers to bid more aggressively. Independent intermediaries also help markets operate more efficiently by reducing the information asymmetries between insurers and buyers that can cause adverse selection. Copyright The Journal of Risk and Insurance, 2006.

Intermediation and Matching in Insurance Markets

“…2 Other European countries have yet not gone that far, but introduced voluntary codes of conduct according to which brokers are not allowed to be compensated by both sides of the market, insurance companies and consumers, at the same time. 3 These developments amplify an ongoing discussion which had already led to interventions, such as the European Directive (2002/92/EC) on insurance intermediation. The latter aimed at improving broker service quality by means of information and documentation requirements in combination with professional liability and mandatory liability insurance.…”

Polski rynek ubezpieczeń na tle kryzysów społeczno-gospodarczych

“…Ze względu na bezpośredni kontakt z kupującym pośrednicy często wyróżniają się też posiadaniem większej niż zakłady ubezpieczeń wiedzy dotyczącej klienta. Mają większą świadomość ryzyk, na które narażony jest konkretny klient, niż ubezpieczyciel, który te ryzyka zabezpiecza (Cummins i Doherty, 2006). Przy odpowiednim wykorzystaniu pozyskanej od pośredników wiedzy w tym zakresie, zakłady ubezpieczeń mogą zarówno unowocześnić swoją ofertę, jak i podjąć próbę dodatkowych analiz potencjalnego rynku.…”

An Empirical Evaluation of Design Decision Concepts in Enterprise Architecture

“…Although disintermediation reduces operational costs, it also increases the risk of adverse risk profiles [13], incomplete or faulty risk profiles of customers. These adverse profiles lead insurance companies to calculate unsuitable premiums or, even worse, to wrongfully issue insurances to customers.…”

“…As a response, ArchiSurance decides to use intermediaries to sell its insurance products. After all, compiling accurate risk profiles is part of the core business of an intermediary [13].…”