What is an insurance agency?  Well, among other things it is a retailer of products. In the U.S. economy, how does the retail business usually work?

Typically, a retailer purchases products from a wholesale source and then marks them up with a higher price and sells to the end consumer. This activity, in a free market, is not regulated by anyone except the consumer. In other words, a retailer is free to charge as much for the products they sell as they can get. The corollary to this is that the retailer’s margins are dependent on their skill and the competitive environment in which they operate.

In the insurance agency business, agencies do the same thing as other retailers except that legally they are required to sell at a price set by others and accept a margin, which is controlled by their supplier and state law. This is the exact opposite of every other business in which federal law requires that suppliers not dictate retail pricing. 

This price fixing is historical, but it is also certainly anti-competitive. When a retailer is paid the same margin as any other retailer, there is little incentive for them to provide exemplary value or service. This is why one agency is pretty much the same as another (at least in terms of value to the customer).

What would happen if agents charged a fee for their service instead of receiving a commission (fixed margin)? I believe mediocrity would disappear!

And, I think the threat of something like the commodization of personal auto insurance would disappear too.  Think about it. If you were free to mark up the auto policy you sell and you provided superior service, you could mark up the policy more than your competitor. You would prosper. Or, if you chose to mark up the policy less than your competitor, but offer less service you also could prosper. 

Consumers would also have a choice.  And the choice would be obvious because agencies would have to market their position and educate their buyer.  Buyers would become more sophisticated and knowledgeable. They would be free to choose a no frills agent or a high service agent. 

This exact strategy has worked in practically all other businesses: food retailing, stock brokerage, travel agencies, department stores, etc.  Try to name an industry besides ours where it hasn’t. 

I think one of the most effective strategies for selling a commodity is to unregulate its pricing. Commissions need to go! 

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