The price of free advice
Abstract:What factors determine how well consumers make their actual choices with regard to financial products? This article empirically evaluates two different choices consumers make when buying deferred annuities. One choice concerns the type of insurance policy, the other concerns the choice of insurance provider. For both choices, we will analyse what factors explain the quality of the choice made. In particular, we will investigate the role of financial advice in the decision-making process. By combining Dutch consumer survey data and data on quotations by Dutch life insurance companies, we obtain the following results. First, respondents who buy their policy directly from an insurer attain a significantly better match between their risk preferences and the type of policy chosen than respondents who purchase their policy through an insurance broker. Second, respondents who buy their policy through an insurance broker obtain a significantly lower payout than respondents who purchased their policy directly from an insurance company. These results raise doubts about the functioning of both the market for financial advice and the market for life insurances.
Document Type: Research Article
Affiliations: CPB Netherlands Bureau for Economic Policy Analysis, The Hague, The Netherlands
Publication date: July 1, 2008