Insurance Marketing Channel as a Screening Mechanism: Empirical Evidences from Taiwan Automobile Insurance Market

Introduction

The choice of a marketing channel is one of the most crucial business decisions for insurance executives. Two types of marketing channels prevail in the insurance market: the exclusive agent or the direct underwriting system, and the independent agent system. ¹ An exclusive agent, or a direct underwriter, is bound to one insurer, whereas an independent agent can sell insurance policies to several insurers.

The choice of a marketing channel has received in-depth attention in the literature. Several studies² have investigated the relationship between the insurer and the agents, whereas other studies³ have examined the relationship between the insured and the agent. Two types of hypotheses are proposed in the literature to support the co-existence of independent and exclusive agents (or direct underwriters) and they are the product quality and the market imperfection hypotheses.

The product quality hypothesis asserts that two distribution systems co-exist in the market because independent agents provide higher service intensity, but with higher costs than exclusive agents.⁴ The market imperfection hypothesis suggests two distribution systems co-exist in the market because of asymmetric information. Venezia et al.⁵ provide a theoretical framework of asymmetric information to explain the co-existence of direct underwriters and independent agents. Their study also predicts that low-risk clients will choose to purchase insurance through direct underwriters during equilibrium, whereas high-risk clients will prefer to deal with independent agents.

Several papers provide empirical evidence supporting the product quality hypothesis.⁶ However, relatively few papers provide empirical evidence to examine the market imperfection hypothesis. The current paper intends to fill this gap by investigating the predictions proposed by Venezia et al.⁵ Moreover, this paper contributes to existing literature by taking a different angle of empirical evidence on the existence of asymmetric information in the insurance market. Several papers found no evidence⁷ supporting the existence of asymmetric information in the insurance market, but other papers⁸ provide a number of evidence supporting it. Most of these papers examine the problem by testing the relationship between the choice of coverage and the occurrence of risk. Unlike those papers, the current study intends to test the choice of marketing channel and the occurrence of risk.

The present study used a unique data set of a large...