Competition in prices of car insurance brokers

Abstract

The final price in a contract of automobile insurance depends not only the insurance company, but also the insurance agent. Thus, the agent is able to change the mechanism initially designed by the insurer, distorting the allocation of risk between the parts. This article adapts the model of Stahl (1989) to automobile insurance market in order to explain the agent's strategic behavior. The model predicts that the expected value of the commission rate chosen by the agent is a decreasing function of the premium required by the insurer. This prediction was tested and confirmed empirically using data on sales of policies in the Brazilian market. In practice, this article gives to the insurers more control over the final price, which drives to a more efficient allocation of risk in this market.