The Coexistence of Multiple Distribution Systems for Financial Services: The Case of Property‐Liability Insurance

Abstract

Property‐liability insurance is distributed through a direct‐writer system, where agents represent one insurer, and an independent‐agency system, where agents represent several insurers. Independent‐agency insurers have higher costs than direct writers. The market‐imperfections hypothesis attributes the coexistence of the two types of insurers to impediments to competition, while the product‐quality hypothesis holds that independent‐agency insurers provide higher‐quality services. We measure cost efficiency and profit efficiency for property‐liability insurers and find strong support for the product‐quality hypothesis, implying that independent‐agency insurers produce higher‐quality outputs and are compensated by higher revenues.