The Impact of Intermediaries on Insurance Demand and Pricing

Abstract

We study the impact of an independent insurance intermediary on insurance demand and pricing. The intermediary holds a fiduciary duty to an unsophisticated insurance buyer and adopts two remuneration systems: a fee-for-advice system and a commission system. Insurance contracting between the buyer (via the intermediary) and the insurer is formulated as a Stackelberg insurance game. Our analysis yields closed-form expressions for the buyer's equilibrium indemnity and the insurer's equilibrium premium loading. Subsequently, we explore the effects of fiduciary duty and remuneration arrangements on equilibrium strategies and stakeholder welfare, unraveling several economic implications. We find that the phenomenon of over-insuring at high premiums attributes to the deterioration of fiduciary duty. Additionally, our results point to the potential presence of tacit collusion between the intermediary and insurer. Moreover, we observe that there is no consensus among stakeholders regarding the most favored remuneration system in the market.

Keywords: insurance intermediary, fiduciary duty, remuneration system, Stackelberg equilibrium

JEL Classification: C72, C73, D81, G22