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James Barrese and Jack M. Nelson

Risk Management and Insurance Review, 1997, vol. 1, issue 1, 51-64

Abstract: Abstract: This paper extends the study of the relative cost efficiency of insurance delivery systems from the primary market to the market for non‐life reinsurance services. As in the primary market for insurance services there are two predominant methods of marketing reinsurance services: reinsurers who rely on employees, termed direct writers, and those who rely on brokers. An extensive literature relating to the primary market for non‐life insurance consistently indicates that independent agency insurers have a cost disadvantage relative to exclusive agency insurers. This literature also suggests that independent agency insurers may supply superior service but a continuing erosion of the market share of independent agency insurers suggests that the perceived service differential is not valued sufficiently to offset the perceived cost differential. The authors find evidence that, cet. par., broker supplied reinsurers operate with lower costs than direct reinsurers but we find less convincing evidence of a service differential favoring direct reinsurers. More significantly, we observe that the largest component of the traditional measure of the reinsurer's cost is the commission paid back to the primary insurer: the seemingly lower cost brokers provide a higher net cost product. Yet brokers thrive in the marketplace suggesting the existence of a product differentiated by service or quality. With the important caveat that measures of service are imperfect and data is limited, we find no evidence of a service differential.

Date: 1997
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Handle: RePEc:bla:rmgtin:v:1:y:1997:i:1:p:51-64