Insurance Marketing Channel as a Screening Mechanism: Empirical Evidences from Taiwan Automobile Insurance Market

Shu-Hui Hsieh, Chun-Ting Liu and Larry Y Tzeng ()
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Shu-Hui Hsieh: 1] Department of Insurance and Finance, National Taichung University of Science and Technology, 129 Sec. 3, San-min Rd., Taichung, Taiwan. E-mails: shshei@nutc.edu.tw; madux@nutc.edu.tw[2] College of Business, Feng Chia University, No. 100, Wenhwa Rd., Taichung 407, Taiwan.
Chun-Ting Liu: Department of Insurance and Finance, National Taichung University of Science and Technology, 129 Sec. 3, San-min Rd., Taichung, Taiwan. E-mails: shshei@nutc.edu.tw; madux@nutc.edu.tw
Larry Y Tzeng: Department of Finance, National Taiwan University, Room 709, Management Hall II 50, Lane 144, Keelung Rd, Sec 4, Taipei 106, Taiwan.

The Geneva Papers on Risk and Insurance - Issues and Practice, 2014, vol. 39, issue 1, 90-103

Abstract: Venezia, Galai and Shapira in 1999 proposed a theoretical framework that considers asymmetric information to explain the co-existence of the independent agent and direct underwriting systems in the insurance market. In separating equilibrium, high-risk clients tend to purchase insurance through independent agents, whereas low-risk clients prefer dealing directly with underwriters. Using a unique data set from Taiwan's automobile liability insurance, this paper tests the screening mechanism hypothesis proposed by Venezia, Galai and Shapira. The results reveal that a positive channel-claim correlation exists in the subsamples of cars aged more than three years. Significant positive channel-claim correlation indicates that high-risk policyholders prefer to purchase insurance from an independent agent, whereas those with lower risks tend to buy insurance from direct writer channels. The results support the screening mechanism hypothesis and demonstrate that marketing channel choice could serve as a screening mechanism in an insurance market characterised by asymmetric information.

Date: 2014
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