How Insurance Brokers Create Value—A Functional Approach

• DOI: http://doi.org/10.1111/j.1540-6296.2009.01176.x
• Published date: 01 March 2010
• Author: Peter Maas
• Date: 01 March 2010

C

Risk Management and Insurance Review, 2010, Vol.13, No. 1, 1-20

DOI: 10.1111/j.1540-6296.2009.01176.x

FEATURE ARTICLES

HOW INSURANCE BROKERS CREATE VALUE—A

FUNCTIONAL APPROACH

Peter Maas

ABSTRACT

Fundamental changes in the market make it necessary for insurance intermedi-

aries to continuously redefine their roles. This study concentrates on a customer

perspective of the future role of insurance brokers, using the theoretical foun-

dations of the customer value approach. Findings from 20 in-depth interviews

with leading managers of various types of multinational companies are sup-

plemented with the results from interviews conducted with representatives of

intermediaries and insurers. From this study it can be concluded that, depend-

ing on the customer’s individual situation, brokers will assume one of four

functions, the choice of which will be highly dependent on the degree of in-

novation and individualization desired. The investigation shows that although

traditional transaction-oriented services will continue to be important, there

will be a shift toward tailor-made solutions with an emphasis on consulting

services, a situation that will require brokers to acquire new skills so as to be

able to meet customer needs.

INTRODUCTION

Recent changes in the insurance markets are indicative of future challenges brokers will

face. On the one hand, inefficiencies in insurance markets were partially defused by

the global emergence of modern information and communication technology, which,

at least theoretically, should have led to a smaller demand for intermediation. On the

other hand, other changes in the industry, such as the deregulationand liberalization of

insurance markets, have resulted in greater product differentiationand correspondingly

lower market transparency, which in turn increased demand for brokerage. Hence,

intermediaries still play a decisive role in facilitating the exchange between consumers

and providers of financial services (see Cummins and Doherty, 2006).

Focusing on the relationship between brokers and insureds, we investigate the value

insurance brokers can create for insureds in today’s challenging environment.Following

Peter Maas is Professor of Business Administration and Insurance Management at the Institute of

Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010 St. Gallen, Switzerland;

phone: +41-71-243-40-43; fax: +41-71-243-40-40; e-mail: peter.maas@unisg.ch. The author would

like to thank Tobias Loher, Alex Blattmann, Albert Graf, and Pascal Buehler for their excellent

research assistance on the project, and Holger Kraus for the outstanding cooperation and support

during the study.This article was subject to double-blind peer review.

1

2RISK MANAGEMENT AND INSURANCE REVIEW

the customer-value approach, we analyze this question from a customer-oriented and

functional perspective. In contrast to an institutional perspective that concentrates on

the internal activities of existing institutions, such as insurance companies or brokers,

the functional perspective focuses on the services provided and needs fulfilled by these

institutions, for example, managing risk or transferring resources across time and space

(Merton and Bodie, 1995). Thus, from the customer-value approach, the functional per-

spective treats the impacts of the broker’s activity on the customer. According to Merton

and Bodie (1995, 2004), a financial system should be analyzed in terms of a functional

perspective because over long periods of time, functions have proven to be much more

stable than institutions. Especially during the last few years, institutions have emerged

and disappeared, evolved and changed, while functional needs have remained stable

(see Allen and Santomero, 1998; Oldfield and Santomero, 1997).

Weask: “What functions do or should brokers fulfill for their customers in order to be suc-

cessful?” In discovering the answer both current and possible future functions of brokers

in the insurance market will be discussed. In accordance with the management-oriented

foundation of the customer-value approach, the results are primarily based on inter-

views with representatives of globally operating companies that either are now or have

a strong possibility of being users of broker services. These findings are supplemented

by those gleaned from a number of interviews with representatives of intermediaries

and insurers, thus achieving a holistic treatment of the topic.

The remainder of the article is organized as follows. First, an overview of the current the-

oretical literature about financial and, especially, insurance intermediaries is provided.

Next is an explanation of the how the applied customer-value approach is integrated

into the applied research method. This is followed by a presentation of the key results of

the qualitative study and their implications, and we close with several suggestions for

future rese arch.

FINANCIAL INTERMEDIARIES IN THE EXISTING LITERATURE

Although most of the research in the field of financial intermediaries deals with the

banking industry (e.g., Germain, 2005; Gorton and Winter, 2002; Winton, 1997; Boyd and

Prescott, 1986; Gale and Hellwig, 1985; Diamond, 1984; Gurley and Shaw, 1960), a few

exceptions can be found. The existing literature generally considers the intermediaries’

role from an economic perspective, which pays little attention to a broker’s success but

focuses, instead, on analysis and description of the insurance market as a whole. From an

economic point of view, the primary objective is to make insurance markets as efficient

as possible and remove market imperfections (Swiss Re, 2004; Spulber, 1999; Sirri and

Tufano, 1995; Dionne, 1991; Strong and Walker, 1987; Rothschild and Stiglitz, 1976).

In this article, we adopt the definition of insurance broker set out by Cummins and Do-

herty (2006, p. 360): an insurance intermediary (or broker) is “an individual or business

firm, with some degree of independence1from the insurer, which stands between the

buyer and seller of insurance.” Optimally, the broker acts completely autonomously

1There are considerable differences in the degree of independence of the intermediaries. An

exclusive agent, for instance, represents only one company and has the lowest level of inde-

pendence. In contrast, brokers and independent agents deal with several companies and act

autonomously. For a detailed discussion on the various degrees of broker independence, see

Cummins and Doherty (2006).