9th Symposium on Finance, Banking, and Insurance
Universität Karlsruhe (TH), Germany, December 11 - 13, 2002

Abstract

MARKETING CHANNELS AND AGENCY PROBLEMS IN SPANISH INSURANCE INDUSTRY

Prof. Dr. Valentín Azofra-Palenzuela*
Prof. MªJesús Castrillo-Lara*
Prof. Dr. Eleuterio Vallelado**

*Universidad de Burgos, SPAIN
**Universidad de Valladolid, SPAIN

The goal of the paper is to test for Spanish market the hypothesis that insurance companies marketing channel is a mechanism to solve agency problems between owners, managers and policyholders. Spiller (1972) findings showed that common stock companies with tradable residual rights get higher benefits than mutual insurance firms do. On the other hand, Mayers and Smith (1982, 1988) and Fama and Jensen (1983 a, b) recognize that insurance companies’ ownership structures are efficient mechanisms for dealing with agency problems. The differences in efficiency will be a function of the conflict of interest between management, policyholders and owners of residual claims. In parallel, other authors study cost differences in marketing channels. Joskow (1973) shows empirically that exclusive agents are more cost efficient than independent agents. Later on, in the 90’s, the survivorship of both types of channels is a signal of their efficiency. Their differences in cost could be due to inefficiency but they can also be explained because independent agents provide more services. Empirical studies show a close relation between marketing channel, ownership structure, company portfolio of products and services that is a function of agency problems between insurers, policyholders and agents.

This paper tries to confirm or reject the previously mentioned hypothesis for the Spanish insurance market. Spanish insurance industry is in a midst of deep transformations as a consequence of people changes in behavior about financial products and services. Nowadays, more people is concerned about its future, including its retirement, which along with its improved financial culture have made them more sophisticated in demanding financial products and services. In this scenario, insurance products and services appear as alternatives that it is worth to consider. In 1996, insurance firms are the third in the Spanish ranking of financial intermediaries’ equity after banks and saving banks but the first as savings collectors.

Our results seem to confirm that agency problems related with ownership and control structure in the insurance industry support insurance firms specialization in different lines of business. Thus, mutual insurance firms specialize in automobile insurance, common stock companies owned by financial institutions specialize in life insurance and common stock companies owned by mutual specialize in life insurance and travel assistance. The later have their business portfolio more concentrated than insurance companies owned either by families or by non-Spanish financial institutions. Furthermore, we have observed that those companies with lower levels of business concentration and that commercialize property and casualty insurance use agents, as their main marketing channel, in a higher proportion than the rest of companies. Therefore, it seems that insurance companies owned by families and/or non-Spanish financial firms focus on lines of insurance with higher managerial discretion, which increases agency problems between policyholder and management. However, they commercialize their products through independent agents that it is a way to alleviate this problem. On the other hand, mutual firms and companies owned by mutuals rely on their own branch network to channel their products because they specialize in lines of insurance with low managerial discretion which reduces agency problems between management and policyholder.