Cost Effectiveness in Insurance Distribution

Abstract

This article explores the extent to which the independent and the systems of distribution of property and liability insurance differ in terms of cost effectiveness. Results of a survey of both types of insurance distributors were used to compare the two systems along several cost effectiveness dimensions. The conclusion of the study is that the system indicates greater effectiveness. It exhibits better performance as regards orchestration of activities of insurers and agents, and has achieved greater productivity at the level. The post-war growth of the writers and the systems' in the property and liability insurance industry has caused many to fear that the independent insurance agent may eventually disappear or occupy only a marginal role in the distribution of property and liability insurance. The alarm felt by many has been expressed by Kenney as follows: Unless major corrective measures are undertaken by those in position to do so, the presently waning system of insurance distribution faces complete disintegration in many areas of our business, and a perpetual state of impotence in those areas wherein we continue to operate.2 A major concern has been the ability of the stock and the mutual insurance companies and of the independent agents to compete effectively on the basis of costs with the writers and the companies. For example, Mehr suggested that: By means of central billing, lower commission scales, lower operating costs, these companies [the writers and the insurers] soon had made great inroads in the automobile insurance field. Their means of attack were classic: they offered a lower cost, comparable quality product. Michael Etgar, Ph.D., is Assistant Professor of Operations Analysis in the School of Management of State University of New York at Buffalo. He has contributed to the Journal of Industrial Economics, Journal of Retailing, Journal of Business Administration, and Industrial Organization Reviewv. 'The careful (as distinguished from common) designation for operations like those of State Farm is exclusive agency while CEICO and Factor Mutuals are direct writers. In this article the focus of analysis is on the former. 2 Roger Kenney, Critique of American Agency System, In Wayne Snyder (ed.), Readings in Property and Casualty Insurance (Homewood, Ill.: Irwin, 1959), p. 266.