The impact of intermediary remuneration in differentiated insurance markets

Annette Hofmann and Martin Nell

No 22, Working Papers on Risk and Insurance from University of Hamburg, Institute for Risk and Insurance

Abstract: This article deals with the impact of intermediaries on insurance market transparency and performance. In a market exhibiting product differentiation and coexistence of perfectly and imperfectly informed consumers, competition among insurers leads to non-existence of a pure-strategy market equilibrium. Consumers may become informed about product suitability by consulting an intermediary. We explicitly model two intermediary remuneration systems: commissions and fees. We find that social welfare under fees is first-best efficient but fees lead to lower expected profits of insurers and non-existence of a pure-strategy market equilibrium. Commissions, in contrast, cause 'overinformation' of consumers relative to minimal social cost, but yield a full-information equilibrium in pure strategies associated with higher expected profits of insurers. This might explain why intermediaries are generally compensated by insurers.

Keywords: product differentiation; intermediation; insurance oligopoly (search for similar items in EconPapers)
JEL-codes: D43 G22 L13 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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