Search costs, choice overload, and intermediary deviation: Barriers to optimal insurance choices in multi-distribution channel setting

This paper explores the challenges that insurance purchasers face when selecting from multiple distribution channels and their impact on insurance demand optimality. It investigates the choice between independently assessing various insurance contracts or relying on potentially dishonest intermediaries. We use a lab experiment mimicking real-world insurance distribution channels with varying informational frameworks, where information is gathered in exchange for search costs. Search costs deter some individuals from thorough exploration, preventing them from finding optimal contracts. However, suboptimality in choices also arises for those exploring extensively, due to choice overload. Lastly, some individuals prefer to delegate to intermediaries, but intermediaries are likely to deviate from optimal advice due to their own financial incentives. Overall, we find that brokers yield the highest rate of optimal choices, but these choices also come at a higher cost. • We examine how insurance customers choose between independent search and delegation to intermediaries. • Search costs reduce exploration, while choice overload affects active searchers, both leading to suboptimal choices. • Intermediaries deviate from optimal advice due to misaligned financial incentives, yet brokers achieve the highest rate of optimal choices. • Broker-mediated decisions yield more optimal choices but at higher costs.