Academic journal article Risk Management and Insurance Review

How Insurance Brokers Create Value-A Functional Approach

Academic journal article Risk Management and Insurance Review

How Insurance Brokers Create Value-A Functional Approach

Article excerpt


Fundamental changes in the market make it necessary for insurance intermediaries to continuously redefine their roles. This study concentrates on a customer perspective of the future role of insurance brokers, using the theoretical foundations of the customer value approach. Findings from 20 in-depth interviews with leading managers of various types of multinational companies are supplemented with the results from interviews conducted with representatives of intermediaries and insurers. From this study it can be concluded that, depending on the customer's individual situation, brokers will assume one of four functions, the choice of which will be highly dependent on the degree of innovation and individualization desired. The investigation shows that although traditional transaction-oriented services will continue to be important, there will be a shift toward tailor-made solutions with an emphasis on consulting services, a situation that will require brokers to acquire new skills so as to be able to meet customer needs.


Recent changes in the insurance markets are indicative of future challenges brokers will face. On the one hand, inefficiencies in insurance markets were partially defused by the global emergence of modern information and communication technology, which, at least theoretically, should have led to a smaller demand for intermediation. On the other hand, other changes in the industry, such as the deregulation and liberalization of insurance markets, have resulted in greater product differentiation and correspondingly lower market transparency, which in turn increased demand for brokerage. Hence, intermediaries still play a decisive role in facilitating the exchange between consumers and providers of financial services (see Cummins and Doherty, 2006).

Focusing on the relationship between brokers and insureds, we investigate the value insurance brokers can create for insureds in today's challenging environment. Following the customer-value approach, we analyze this question from a customer-oriented and functional perspective. In contrast to an institutional perspective that concentrates on the internal activities of existing institutions, such as insurance companies or brokers, the functional perspective focuses on the services provided and needs fulfilled by these institutions, for example, managing risk or transferring resources across time and space (Merton and Bodie, 1995). Thus, from the customer-value approach, the functional perspective treats the impacts of the broker's activity on the customer. According to Merton and Bodie (1995, 2004), a financial system should be analyzed in terms of a functional perspective because over long periods of time, functions have proven to be much more stable than institutions. Especially during the last few years, institutions have emerged and disappeared, evolved and changed, while functional needs have remained stable (see Allen and Santomero, 1998; Oldfield and Santomero, 1997).

We ask: "What functions do or should brokers fulfill for their customers in order to be successful?" In discovering the answer both current and possible future functions of brokers in the insurance market will be discussed. In accordance with the management-oriented foundation of the customer-value approach, the results are primarily based on interviews with representatives of globally operating companies that either are now or have a strong possibility of being users of broker services. These findings are supplemented by those gleaned from a number of interviews with representatives of intermediaries and insurers, thus achieving a holistic treatment of the topic.

The remainder of the article is organized as follows. First, an overview of the current theoretical literature about financial and, especially, insurance intermediaries is provided. Next is an explanation of the how the applied customer-value approach is integrated into the applied research method. …

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