Intermediation, Compensation and Collusion in Insurance Markets

Uwe Focht, Andreas Richter and Joerg Schiller ()

Discussion Papers in Business Administration from University of Munich, Munich School of Management

Abstract: 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.

Keywords: insurance; brokerage; collusion; compensation; information (search for similar items in EconPapers)
JEL-codes: D83 G22 J33 (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-com and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:msmdpa:1647

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