The authors are grateful to Richard MacMinn for insightful comments on an earlier version of this article. The authors acknowledge the financial support of the American Insurance Association for this research.
The Economics of Insurance Intermediaries
Article first published online: 7 SEP 2006
Journal of Risk and Insurance
Volume 73, Issue 3, pages 359–396, September 2006
How to Cite
Cummins, J. D. and Doherty, N. A. (2006), The Economics of Insurance Intermediaries. Journal of Risk and Insurance, 73: 359–396. doi: 10.1111/j.1539-6975.2006.00180.x
- Issue published online: 7 SEP 2006
- Article first published online: 7 SEP 2006
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.