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Agent Discretion and the Choice of Insurance Marketing System

This article argues that different insurance marketing organizations arise as a means to minimize the costs of correctly matching policyholder risks with insurance coverage. When policyholders are easily sorted without sales agent participation in screening, exclusive dealing will be the preferred marketing organization; when agent information is important for risk placement, independent agency may be preferred. Empirical support for our theory is obtained from analysis of compensation contracts and market shares of the different marketing forms. Exclusive dealers are found to be prevalent in relatively standardized, homogeneous product lines and markets, and their agents receive less profit-based compensation than those of independent agency insurers. These findings are consistent with our theory.