Research Handbooks in Law and Economics series
Edited by Daniel Schwarcz and Peter Siegelman
Chapter 2: Insurance agents in the twenty-first century: The problem of biased advice
Insurance intermediaries who focus their efforts on individuals and small businesses face an ever-shifting landscape. As with the travel agents of the 1990s, their value in facilitating insurance transactions is increasingly being challenged by technological advances (McKinsey & Co. 2013). Websites and mobile ‘apps’ already offer consumers the opportunity to bypass traditional insurance intermediaries by providing automated underwriting and policy-selection guidance. And the continuing implementation of health insurance exchanges may well accelerate these technological shifts as consumers become increasingly comfortable with making their insurance purchases online. This chapter suggests that these technological innovations in insurance distribution systems hold significant promise not only to decrease insurance costs, but also to improve consumer matching with appropriate and affordable coverage. This conclusion arises out of the chapter’s assessment that insurance consumers currently face a meaningful risk that traditional insurance agents will subvert their clients’ interests to maximize commissions. At root, this risk stems from various market failures, including massive information asymmetries between consumers and insurance intermediaries, the credence–good nature of insurance and the magnitude of consumers’ behavioral biases in making insurance decisions. But it also emerges out of important legal and regulatory failures that leave consumers with few, and generally ineffective, safeguards against misconduct by insurance agents.
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