Insurance Agents in the 21st Century: The Problem of Biased Advice
Forthcoming. in D. Schwarcz & P. Siegelman (eds), Handbook on the Economics of Insurance Law(Edw. Elgar, 2015)
31 Pages Posted: 25 Aug 2014 Last revised: 22 Aug 2015
Date Written: August 23, 2014
A substantial fraction of insurance bought by consumers and small businesses is sold through insurance agents rather than purchased directly from firms. Insurance agents can serve valuable “market-making” functions by providing information to both sides of a transaction; and they can offer unsophisticated parties useful advice about how to choose from among a surfeit of complex options. At the same time, agents can inefficiently withhold information and distort consumer choices by providing misleading information or operating in their own self-interests. This Chapter surveys the legal and economic literature on intermediaries operating in consumer-driven insurance markets, analyzing the extent to which competition and/or regulation promote objective and high-quality coverage information and advice. It concludes that neither market forces nor legal or regulatory rules substantially constrain insurance agents’ capacity to advance their own interests by providing biased advice, though direct empirical evidence about the frequency of such misbehavior is limited. Although legal or regulatory reforms could improve matters, the Chapter suggests that institutional-cum-technological developments now underway will likely lead to the replacement of human insurance agents by software similar to that which has largely displaced human travel agents. This change poses both opportunities and pitfalls for regulation. Software may provide more accurate, less biased and more easily-regulated market-making services than humans now do. But it may also facilitate mismatching and be subject to the same kinds of misguided incentives as human intermediaries.
Keywords: insurance, agent
JEL Classification: G22, K29
Suggested Citation: Suggested Citation