Academic journal article Journal of Risk and Insurance

The Quality of Insurance Intermediary Services-Empirical Evidence for Germany

Academic journal article Journal of Risk and Insurance

The Quality of Insurance Intermediary Services-Empirical Evidence for Germany

Article excerpt


Competing insurance intermediaries provide heterogeneous services that are difficult for incompletely informed consumers to assess. Transaction cost economics, search theory, and principal-agent theory provide arguments on product quality differences between exclusive agents and independent intermediaries. This article uses a sample of 927 insurance intermediaries in Germany. By performing OLS estimations, we test the impact of the different distribution channels and other factors on intermediaries' service quality. Depending on the proxies used for service quality, we find mixed evidence for the product quality hypothesis. Service quality depends to a large extent on the information-gathering and processing activities of the individual intermediaries, independent of the respective distribution channel.


The profound information asymmetries between consumers and insurance companies have resulted in the evolution of institutions that mediate between consumers and insurance companies. Insurance intermediaries such as exclusive agents and insurance brokers hold an important position as matchmakers between the supply and demand sides on insurance markets. On one hand, they provide distribution and marketing services for insurance companies, but on the other hand they also supply informational and advisory services for consumers. Insurance intermediaries assist in concluding insurance contracts by providing low-cost information to consumers regarding their risk profiles, insurance needs, and suitable insurance products, thus reducing complexity for consumers and transaction costs for insurance companies.

However, while insurance intermediaries contribute to enhancing transparency in insurance markets, the insurance intermediary market itself is characterized by information gaps since consumers act under asymmetric information about the quality of the information and advisory services provided by the intermediaries. These services are experience and credence goods; a consumer cannot fully assess the service quality provided by competing insurance intermediaries until well after the information and advice have been "consumed." In some cases, such an assessment is barely possible at any time. Especially for long-term insurance products such as oldage or disability insurance, the quality of the information and advice given can be evaluated only after the insured risk has actually occurred, an event that often takes place decades later. Common business practices that have evolved over time add to the lack of transparency, especially in terms of remuneration practices and disclosures about business relationships between intermediaries and insurance companies; consequently, consumers have only restricted information about potential conflicts of interest and potential bias in the information and advice given by insurance intermediaries. This is not just a theoretical possibility. In the United Kingdom, insurance intermediaries used these asymmetries to provide misleading and incomplete information to the detriment of consumers in the 1990s (Davis, 2004). In 1997, the British government began paying billions of British pounds to compensate millions of employees who had opted out of occupational pension schemes because of bad advice given by financial intermediaries.

In this article, we try to shed light on the question of the service quality provided by insurance intermediaries. Our research is based on a sample of 927 German exclusive agents, independent agents, and insurance brokers who answered a survey in 2001. In the German market for personal insurance exclusive agents held about 80 percent market share in 1985, by 2005 they had experienced a precipitous decline to 27 percent (Towers Perrin, 2007). By contrast, insurance brokers, who accounted for only 14 percent of insurance sales in 1985, increased their share to nearly 33 percent in 2005. Banks, which had a negligible share 20 years ago, raised it to nearly 25 percent in 2005. …

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