Role of intermediaries
The theoretical and empirical literature on the role of intermediaries in a wide range of sectors identifies 4 core economic contributions of intermediaries. These contributions also apply to insurance intermediaries.
In general, through their activities, intermediaries:
– decrease search and matching costs; – allow economies of scale to be reaped; – help reduce adverse selection; and, – help overcome moral hazard issues.
The market for insurance products, like many other markets, is characterised by imperfect asymmetric bargaining power. Insurance intermediaries play a key role in the marketplace by:
– identifying the risks faced by clients; – reducing insurance distribution costs; – reducing search cost for clients; – reducing uncertainty about the riskiness of potential insurance clients and the reliability and financial robustness of the insurance companies;; – reducing asymmetric bargaining power; – supporting clients when filing a claim; and, – more generally, supporting and promoting competition in the insurance market.
Structure of the insurance intermediary sector and contribution to EU27 GDP
While the precise structure of the insurance intermediary sector (i.e. all the undertakings and individuals involved in the sale of insurance products other than direct sales by insurance companies) varies across EU Member States, it is typically characterised by a pyramidal structure with a large number of very small intermediaries and a very small number of large and very large intermediaries.
In all the 20 EU Member States for which there exists detailed information on the relative importance of different insurance distribution channels, the insurance intermediary sector accounted for more than 50% of all premiums (life and non-‐life) in 2008.
Moreover, in 7 of these 20 Member States (Belgium, Germany, Italy, Luxembourg, Malta, Portugal and Slovenia), insurance intermediaries accounted for 80% or more of all insurance premiums. The insurance intermediary sector is estimated to have generated directly 95 billion Euro of value added in 2008 or 0.8% of total EU GDP (at current prices).
Taking into account the indirect effects (multiplier effects) of its activities, the contribution of the insurance intermediary sector to EU27 GDP in 2008 is estimated at 148 billion Euro or 1,1 % of EU27-wide GDP.
Remuneration of insurance intermediaries
Generally, there are two primary mechanisms by which insurance intermediaries are compensated for their services:
– a fee system under which the client directly pays for the services provided; and, – a commission system under which the intermediary is paid a percentage of the premium paid by the client for coverage based upon the intermediary’s agreement with the carrier.
Whether a fee or a commission is the best choice should be decided by the parties on a case by case basis and in transparent dialogue about the various possibilities with the intermediary. From an economic perspective, overall, there exists no system which is preferable in all circumstances.
The co-‐existence of various remuneration systems, and in particular the freedom to decide about the remuneration systems between the parties, is the best guarantee for competitive, efficient and dynamic markets that work for the client.