The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property-Liability Insurance
Posted: 26 May 1998
Property-liability insurance is distributed by independent agents, who represent several insurers, and exclusive agents, who represent only one insurer. The independent agency system is known to have higher costs than the exclusive agency system. The market imperfections hypothesis attributes the coexistence of the two systems to impediments to competition, while the product quality hypothesis holds that independent agents provide higher quality services. We measure both profit efficiency and cost efficiency for a sample of property-liability insurers and find strong support for the product quality hypothesis. The data are consistent with a higher quality of output for independent agency insurers that is rewarded with additional revenues.
JEL Classification: G22, G28, G32, L89
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