Distribution channels and growth strategies in Spanish insurance: from networks of agents to branch offices (1870–1940)

Depósito de investigación de la Universidad de Sevilla https://idus.us.es/ “This is an Accepted Manuscript of an article published by Taylor & Francis in Business History on 2024, available at: https://doi.org/10.1080/00076791.2021.1979516.” Distribution Channels and Growth Strategies in Spanish Insurance: From Networks of Agents to Branch Offices (1870-1940) Jerònia Pons Ponsa & Pablo Gutiérrez Gonzálezb ABSTRACT This paper analyses the factors that determined the choice of distribution channel within the Spanish insurance industry and its relation with growth strategies performed by firms. To achieve this goal, we have gone through documentary sources from the main companies to examine the relationships between companies and agents and their costs, namely: the design of agency contracts, the different procedures on the selection of agents, and the guidelines for inspection, supervision and control of agent networks. Using the framework of agency theory, this paper aims to enhance our understanding of the conflicts and dynamics that determined the distribution of such a complex financial product as insurance in a late development economy. We show how insurance companies began the transition to the branch system in the 1920s to reduce the costs arising from the control and monitoring of agents and to mitigate agency conflicts. a Jerònia Pons Pons is Professor of Economic History, Department of Economics and Economic History, University of Seville (Spain) b Pablo Gutiérrez González is Assistant Professor, Department of Economics and Economic History, University of Seville (Spain) 1. Introduction Starting in the mid-nineteenth century, the introduction of new techniques and resources arriving from abroad fostered the expansion of the insurance market (Frax and Matilla, 1996; Pons, 2003). The entry of foreign companies injected new capital into the sector, while access to international reinsurance networks provided the Spanish economy with risk diversification services (Pons, 2005; 2008; Pearson, 2010; Gutiérrez and Andersson, 2018). The importation of mortality tables enabled a more precise design of companies’ risk portfolios, while also facilitating the spread of products associated to life insurance (Pons and Gutiérrez, 2017). At the same time, management techniques adapted from 2 foreign companies contributed to consolidating the sector (Pearson, 2012; Pons 2007; 2012). One of the key elements in the growth of the business was the establishment of distribution networks adapted to the complex reality of the Spanish market. 1 The need to come up with forms of organisation that were flexible and able to provide coverage for large geographical areas with a very limited demand made the agency system a vital element in the consolidation of the market. 2 Certainly, while during the nineteenth century insurers focused on the main Spanish cities such as Madrid, Barcelona, Bilbao and Malaga, the growth in market potential beyond these opened up new horizons for the sector. The business opportunities in smaller provincial capitals led to the establishment of extensive networks of agents to represent companies. These developments led to the creation of agency relationships between representatives and companies, embodied in increasingly complex and detailed contracts designed to protect the positions of both parties. Moreover, the dynamics of the insurance market itself encouraged the development of extensive subcontracting networks that contributed to channelling the supply in extensive Spanish regions. 3 Far from being established as homogeneous practices, insurance companies focused their distribution strategies in very different ways: mutual and stock companies revealed different dynamics that were reflected in both their results and their distribution costs, while foreign companies displayed more aggressive or conservative practices according to their corporate culture and origins (Westall, 1994; Pearson, 1997). As a result, a diverse network of distributors served as the driver for the expansion of the insurance market to the vast Spanish rural world much before the introduction and spread of the branch system from the 1920s. The aim of this paper is to examine the historical process shaping insurance distribution systems in Spain. The Spanish case is relevant because of the high presence of international companies that coexisted with growing domestic insurers during this 1 However, long-term results of the company relied on other elements as well. See Adams et al (2014) for a review of factors determining a firm’s growth. 2 In 1900, more than 67 % of the Spanish population lived in municipalities of less than 10,000 inhabitants, and more than 27 % lived in localities of less than 2,000 inhabitants (Carreras and Tafunell, 2005). Contemporary specialists and practitioners such as Cenamor (1935) or Anguera (1907) noted the vital role of agents in rural areas. 3 Fiscal sources, such as the Estadística sobre la Contribución de Utilidades de la Riqueza Mobiliaria (ECURM), and reports by the supervising agencies, such as the Memoria de la Dirección General de Banca, Bolsa e Inversiones, allow us to draw an accurate map of the evolution of agent networks in Spain. In the case of Andalusia, there were 74 registered insurance agents in 1932: however, far from being uniformly distributed, these were concentrated in the provinces of Cordoba (14), Seville (30) and Malaga (30). The rest of the territory depended directly on auxiliary networks of these sales agents. See ECURM, Year 1932. 3 period, which resulted in the development of varied agency-related problems. Moreover, the Spanish experience contributes to the general business history of Europe since it allows us to explore corporate distribution strategies performed by both multinational and domestic firms in a changing regulatory environment. Indeed, while Pearson and Lönnborg (2008: 68-9; 74-9) make a general review of the relationships between insurance regulation and the forms of institutional presence adopted by multinationals, we offer a specific case study that involves a highly internationalised market undergoing profound regulatory transformations. To do this, we utilise official statistics from the regulatory agencies and archival sources from four private companies operating in Spain: private correspondence, internal reports and official records from the boards of administration of the Sun Insurance Office, the Equitable Life Assurance Society, the Zurich Group and Mutua General de Seguros. On this basis, we use the framework of agency theory to delve into the different procedures on the selection of agents, network control systems and the costs of the relationships between companies and agents. To this end, the second section outlines the implications of agency theory on insurance distribution systems and analyses their evolution in Spain from the late nineteenth century to the mid-twentieth century. The third section examines two cases of foreign insurers implementing a network of sub-agencies from their entry into Spain until their consolidation in the market in the nineteenth century. The fourth section explores two cases of dealing with rising monitoring costs within the transition to the branch system in the twentieth century: the case of Mutua General de Seguros and the interactions between agencies and branches, and the Zurich-Hispania group and the institution of shared distribution networks within a foreign insurance group in Spain. Finally, we draw some conclusions. 2. Distribution systems in the Spanish insurance market Insurance companies use different mechanisms to sell their products in the market: sales personnel employed directly by the firm, external agents or, more recently, through Internet and call centres. (Kim et al., 1996; Hilliard et al., 2013). The choice of one method or another has important repercussions on a company’s results, since this appears as a key element defining the growth strategy of the firm. While the internalisation of the commercial function leads to companies facing higher operational costs and lower rates of return, the use of external agents maximises sales results, but it is also the source of complex relationships between the principal and the representative. Certainly, through the lens of agency theory, the interests of the firm and the external agent diverge as 4 regards the criteria of risk selection and hence the structure of the risk portfolio, which results in problems of information asymmetry (Parente et al., 2010). Therefore, the firm’s lack of control over the agent creates moral hazard and thus, the agent persists in writing more policies, even when this could deteriorate the internal balance of the risk portfolio (Cummins and Doherty, 2006). Moreover, problems of adverse selection due to a lack of information about the market can lead to companies facing higher agency costs, arising from the monitoring and control of agents in order to keep a sound risk portfolio. Indeed, the dangers of this system arose from the possibility that the main agents could direct this network in their own interests, which could work against the actual needs of the company. The establishment of agencies and the hiring of agents increased over time as the insurance industry became more technically sophisticated and professionalised (Stalson, 1942: 608). Most companies opted for a system of independent agents, which afforded them great flexibility in their operations and brought them a greater market share, although in exchange for lower profits than those obtained in a direct subscription system. This was the most common system in the first stages of territorial expansion of both national and international insurers, but there were notable differences. For example, Price (1909) underlined the risky practices applied by American insurers. By paying higher commissions to the agents, they got a larger number of policies underwritten, but also higher levels of cancellation of contracts because of unpaid premiums. Buley (1967) noted this strategy for the specific case of the Equitable Life Assurance Society. On the contrary, Jenkins (1984) described much more conservative practices in the case of British fire offices such as the Phoenix, the Royal Exchange or the Sun Insurance Office. Furthermore, these practices were exported to third countries: Keneley (2015) explores the case of American life insurers in the Australian market. During the nineteenth century and into the first decades of the twentieth century, agents had their own premises and employees and they usually combined this position with other activities. Despite this relative freedom, many companies introduced several elements of hierarchisation among agents in the area, who were generally dependent on a main representative who was responsible for managing the network of sub-agencies. In this consolidation process, legislation adapted to the changing realities of the insurance world in order to clarify the role of the agents. In the Spanish case, a new tax regulation in 1893 introduced a 2% payment on insurance premiums for companies, and the same 5 percentage on the commissions that the companies’ agents received. 4 The new legislation considered agents to be all those persons not employed by a company, who procured subscriptions for insurance offices and charged commission for their work. A more precise clarification of the figure of the agent would arrive in 1929. According to the new regulation, those who managed insurance operations for remuneration and acted as intermediaries between the insurer and the insured were considered to be insurance managers. 5 These were classified into free insurance brokers and insurance agents. The former did not have a contract with any company, they operated freely and independently of any insurance company. Brokers had to join the official register of insurance brokers of the insurance regulatory agency. Agents, however, obtained their appointment, authorisation and licence from an insurance company, so they were able to engage in insurance operations without registering in the official register. Brokers gradually organised themselves into professional associations to promote the professionalisation of the activity. 6 Finally, a regulation passed in 1934 established compulsory registration in the Colegio Oficial (professional association) to work as an insurance agent. 7 The maturation of the legal treatment accompanied the growth of the importance of the agent networks. As noted in Figure 1, the insurance companies’ agent networks were consolidated in Spain during the first third of the twentieth century, going from barely 300 registered in 1901 to almost 6,000 in 1932. The increase in the number of agents was a key aspect of addressing market expansion, especially in those lines that needed denser distribution networks. In this respect, the nature of the products in life and fire lines forced a more intensive use of this channel of distribution. Far from being a uniform progression, the period from 1905 to 1925 stands out, when the total number of agents registered in Spain multiplied eightfold, with growth slowing down thereafter. FIGURE 1. Insurance agents registered in Spain and total premiums collected in the main lines of insurance, in millions of 1928 pesetas (1901-1932). 4 Gaceta de Madrid, 13 August 1893, 563-564. 5 Gaceta de Madrid, 11 July 1929, 275-277. 6 In 1933, there were fifteen provincial associations of insurance agents in Spain, as well as the National Association of Insurance Agents in Barcelona. Gaceta de Madrid, 27 August 1933, 1344. 7 Gaceta de Madrid, 1 January 1935, 5. 6 Source: Memoria de la Dirección General de Banca, Bolsa e Inversiones, 1951, and ECURM (1901-1932). Indeed, from the 1920s the networks of agents were complemented by the creation of the companies’ own branch offices, staffed by salaried employees. Although this was part of a global trend, there were several factors that contributed to the introduction of the branch system in Spain. First, some factors were of a general nature, such as the abovementioned extension of the network and the interest in controlling the administration costs due to the increase in administrative tasks. Second, another factor was of a regulatory nature: the Insurance Registration and Inspection Act passed in 1908 set out several requirements for operating in Spain. Companies now had to give detailed information of their portfolios to a newly created regulatory agency, while minimum deposits in the country were required to obtain administrative permission to sell policies. In addition, the new legislation modified the investment strategies of insurers, establishing that 50% of their reserves had to be deposited with the Bank of Spain or in the Caja de Depósitos, 25% of which had to be comprised of Spanish securities. From 1925, a maximum of 25% of the remaining 50% could be invested in property or mortgage loans, as indicated by Pons (2003a; 2003b). By allowing reserves to be accumulated through the purchase of property, the legislation strengthened the insurers’ interest in having their own offices in the main cities (Pons, 2009). Over time, many of the branches with salaried staff on the insurer’s payroll exercised control over the agents in their area of influence, substituting the main representatives. Finally, among the most powerful drivers within the transition to the branch system were the agency problems generated by the network of agents. Indeed, the costs arising from the lack of control over independent agents and, in some companies, the costs associated with the effective surveillance of these agents, made 0 1000 2000 3000 4000 5000 6000 7000 8000 0 10 20 30 40 50 60 70 80 1900 1905 1910 1915 1920 1925 1930 1935 Industrial Fire Marine Life No. Of Agents 7 supporting agency distribution systems too expensive for firms to maintain their operations in this manner. TABLE 1. The branch system in the Spanish insurance industry 1933-34 Company Nationality Headquarters Branches Aragón Spanish Zaragoza Madrid Sevilla Assicurazioni Generali Italian Barcelona Madrid Banco Aragonés de Seguros Spanish Zaragoza Madrid Seville Banco Vitalicio de España Spanish Barcelona Bilbao Madrid Seville Valencia Málaga Zaragoza La Catalana Spanish Barcelona Madrid La Victoria de Berlín German Madrid Seville Valencia Plus Ultra Spanish Madrid Seville Málaga Vigo Previsión Española Spanish Seville Madrid Rossia Danish San Sebastián Barcelona Sun Insurance British Bilbao Cádiz Source: ‘Nomenclator de Directores y Agentes de Compañías’. Anuario Español de Seguros (1933-34), 195-224. However, not all companies were equally affected by these factors. Table 1 shows a sample including some of the most important insurance companies in Spain. 8 As can be seen in the table, with the exception of La Victoria de Berlín, all companies establishing more than one branch were domestic offices. Indeed, Spanish insurers could use these facilities to strengthen their reserves; in those cases of companies located outside Madrid, the establishment of a branch in the capital would have been more attractive as long as administrative centralism increased. Nevertheless, foreign offices were reluctant to immobilise their investments in the country in the form of buildings and premises. Certainly, Pons (2005; 2008) noted that foreign companies had reduced their ties with the Spanish market during the first two decades of the twentieth century, due to both the 8 The case of La Unión y el Fénix Español goes far beyond this process: this company, the first in the Spanish market, built its own facilities in the main streets of provincial capitals with a very specific architectural style, in order to transmit a solid financial image to the public. (La Unión y el Fénix Español, 1964). 8 tightening of regulations and a lack of trust in the performance of the Spanish economy. Under these circumstances, to fix investments in the form of physical capital would not be a viable choice for these companies seeking flexibility and, thus, they were more apt to maintain their agencies despite the costs of monitoring external agents. FIGURE 2. Management expense ratios in the main lines, in millions of constant 1915 pesetas (1915-1950). Source: Memoria de la Dirección General de Banca, Bolsa e Inversiones, 1951. The change of strategy towards a branch system picked up momentum in the 1930s. In 1934, a professional journal included 950 insurance company representatives and points of sale of in Spain: most of them belonged to the categories of executive directors (214) and independent agents (706). Along with this network, twenty-one branches were active in the country. 9 More than the half of them (517) were located in 21 cities, with Barcelona (129) and Madrid (93) concentrating most of the points of sale. In other cities, most of the representatives were exclusive agents. At this time, several companies were replacing agents by branches operated by salaried staff, such as Banco Vitalicio de España and Plus Ultra, among others. While the internalisation of commercial functions lowered the costs of monitoring external agents, the consolidation of denser marketing networks with branches led to a substantial increase in firms’ management expenses. As shown in Figure 2, the expense ratios of the insurance sector grew across the board in aggregate terms. In the transport line, the main component of production costs corresponded to the inspection of hulls and merchandise, both for the valuation of the insured capital and for the inspection of claims, which was reflected in the sudden increase experienced during the Second World War 9 ‘Nomenclator de Directores y Agentes de Compañías’. Anuario Español de Seguros (1933-34), 195-224. 0 5 10 15 20 25 1915 1920 1925 1930 1935 1942 1945 1950 Work accidents Fire Transport Life 15 firm. The success of both the Sun and the Equitable in Spain was based on the choice of the company’s main agent, although they had different ways of dealing with information asymmetry and moral hazard. The Sun’s policy was oriented towards prioritising prudent risk selection to counterbalance the expansive ambition of the main representative, which entailed higher monitoring costs arising from close supervision of new underwritings, the performance of the portfolio and the selection of sub-agents. The Equitable, on the contrary, gained a prominent position in the life branch through higher levels of flexibility and autonomy in managing the agency portfolio, although the lack of supervision brought a more unstable portfolio and, eventually, serious conflicts and a lack of confidence in their main representative in the country. Thus, while the Sun preferred a small healthy business to uncontrolled growth, the American giant aspired to be the leader in the Spanish market. 4. The transformations of the distribution systems in the twentieth century: agencies and branches in Spanish insurance The creation of a network of agencies was a challenge for insurers who had to expand their sales function but also maintain control over agents. The key to this expansion was to strike a balance between agents’ interests in obtaining more income through commissions and the increasing tendency of insurance entities to give priority to a healthy portfolio of policies and to assess risks in order to avoid high claims. As noted by Anguera (1907), companies tried to set standards of good practices during the first decades of the twentieth century. In parallel, several national and foreign insurers opted to establish their own branch offices run by salaried staff, which took on some administrative tasks and assumed control of the distribution network in their area. This decision was accompanied by the acquisition of real estate properties in the prestigious centres of the main cities and allowed companies to address the problems of information asymmetry and rising costs resulting from agent monitoring. This was the case of Mutua General de Seguros. The rapid growth of the company in industrial accident insurance from 1907 onwards was based on a policy of high commissions: indeed, a commission of 40% on premiums for new customers was agreed for members of the mutual and agents who provided the company with new members. This system produced excellent results in the short term by means of extending the geographical area of influence of the office, increasing the number of members and expanding into new sectors of activity, although in return it also brought high loss ratios. A typical problem of moral hazard was the fact that agents were not particularly interested 16 in distinguishing sound customers or high-risk contracts, as they would earn the same commission in either case. 28 Around 250 companies had joined Mutua General by 1909, most of them located in Catalonia. During the following years, the mutual opened agencies in the region of the Spanish Levant and in some Andalusian and Galician cities. By 1916 it had agents in 30 localities all over Spain. The agency network was the main system used by Mutua General until shortly before the Civil War. Agents had their own premises and they were responsible for hiring their own staff, channelling policy proposals to head office, collecting premiums and sending their income on a regular basis. Exceptionally, the mutual paid for some improvements in the main offices such as, for example, installing a telephone. However, the administrative tasks were controlled from the head office, where the mutual concentrated all its organisational operations. In 1920, Mutua General had 27 workers at its head office. At this time, work in this office was organised into different specialised departments. The portfolio department was responsible for external production and organisation. The staff of this department comprised a manager and two employees who performed the work of inspectors by organising and visiting the fifty offices that the mutual had at this time. Another department was for fees, with a large staff who prepared the receipts at the end of each quarter. In the accounts department, operations with members were monitored and processed: premiums collected, compensations paid and expenses run up were all entered in the books. In this way, the balance of each policy was known and this enabled assessment of the need to increase or, where appropriate, reduce the premium charged. 29 The first step taken by Mutua General towards the creation of branch offices was in 1927. The agent in Madrid did not meet the mutual’s expectations, mainly due to a high policy cancellation rate and above-average loss ratios. In exchange for a generous pension, he was replaced by a branch office, created in Madrid with its own staff. This procedure, first tried out in Madrid, started to spread rapidly in the first half of the 1930s, accompanied by the purchase of buildings for the branches being created in the process. By 1935, properties had been acquired in Seville, Madrid and Bilbao. However, this development of a network of branches and the increase in company property was 28 Diversification of members was a generalised strategy of mutual societies. Butt (1984: 166-67) has noted a similar trend for the Standard Life in the 1930s. 29 Archivo Mutua General de Seguros, Libro de Actas del Comité del Ramo de Accidentes del Trabajo, 1, 21 December 1928. 17 interrupted by the Civil War and was not taken up again until 1939. By 1942, Mutua General had 21 agencies and 705 branch offices throughout Spain. These agencies took on some of the administrative tasks, although most of these were still performed by the head office (Benítez de Castro, 1943:41). As we have shown, the need to improve their commercial dimension encouraged companies to create and maintain a dense distribution network. In turn, this was a decisive asset in the event of takeovers or the mergers of several companies. The acquisition of a company with an important established network of agents enabled exponential growth in production in record time, despite the managerial problems and duplications in the commercial network that this could cause. This was the case of the insurance company Zurich, which became increasingly involved in the Spanish market when several foreign companies in the country were considering their withdrawal. It first acquired Hispania, in 1915, and then subsequently incorporated Vita in 1928, which resulted in a large insurance group equipped with a complex distribution network. At the start of the twentieth century, Zurich specialised in the accident line. The company had granted representatives of the British Reliance Marine Insurance permission for a general agency in Barcelona in the lines of fire and marine insurance. Although a network of sub-agencies was developed on the basis of this Barcelona agency, the actual activity of the company in Spain was very limited until 1915, when it acquired a Spanish insurer specialised in accidents: Hispania. This company had been founded in Barcelona in 1902 and had subsequently developed a broad technical base for the production and marketing of accident and fire insurance. The distribution network used both exclusive agents and also others shared with insurers from other lines. When Zurich launched the takeover of Hispania, it led to duplication, as both Swiss and Spanish companies had their headquarters in Barcelona, specialised in the same line of business. Consequently, as from 1915, they had to coordinate their strategy and the functioning of their distribution networks, both internal (branches) and external (agents). Even though both companies remained legally independent, a joint management and common strategy were established, following instructions sent from the Swiss company’s head office in Zurich. 30 From 1920, both companies shared the highest executive positions. Management was centralised in Barcelona, where salaried company employees performed the work of issuing policies, control and payment of claims and 30 Zurich Corporate Archive, Hispania. Book of Minutes of the Board of Administration 1909-1918, 18 June 1917. 18 other administrative tasks. This basically constituted the internal organisational structure. The external organisation was in the hands of a network of non-exclusive agents supervised by territorial inspectors. 31 These inspectors were paid employees of the two insurers and met regularly with local officers from both companies and received a salary and a series of commissions determined by the production of the province or provinces under their supervision. The resulting corporate group was completed in 1927 with the integration of the life insurer Vita. 32 Although this company experienced fast growth after establishing itself in Spain, its Spanish portfolio showed a higher percentage of portfolio terminations than in other markets, such as Germany or Switzerland. 33 This factor obliged the Swiss head office to impose greater supervision on agents in Spain, who could sometimes act irresponsibly by accepting policies that were highly unlikely to be continued over time and by procuring premiums primarily in order to collect the commission for new policies (Pons, 2015: 115). Therefore, control and monitoring over agents to address information asymmetry became a key element in the integration of the three companies. The Zurich management board persisted in its efforts to introduce new practices and reinforce the standardisation of sales management procedures. Indeed, increasing competition from employers’ mutuals after the introduction of compulsory industrial accident insurance in 1932-33 led to the implementation of new marketing techniques. Specifically, there was a concerted attempt to convince the public and potential clients of the internal problems of mutual societies and the risks of taking out coverage with them, focusing on their low levels of solvency and administrative shortcomings. 34 However, despite these advances, the control of agencies and their portfolios remained a major issue for the company, since it was increasingly expensive. The complexity of this supervision can be seen in correspondence between the branch in Spain and the general management at the head office in Zurich in 1935. The management board in Zurich planned to standardise the control procedure performed by inspectors. The main goal was to collect key information on the policies and portfolio of each agency, with a 31 Zurich Corporate Archive, Hispania, Internal Reports 1902-1952. 32 The company VITA was created in 1922 with the company Zurich as its main shareholder. It was granted a federal concession on 23 April 1923. Thanks to the initial help from collaborators of the parent company and then with the creation of its own organisation it expanded its activity and established itself in a considerable number of countries. In 1933, its internal organisation comprised 260 employees, including the general management in Zurich and its diverse branches abroad. Its external organisation was made up of some 250 professional agents and more than 1,300 free agents (Pons, 2015: 110-3). 33 Zurich Corporate Archive, Vita, 30000-1. 34 Zurich Corporate Archive, Zurich España, 1935-1943, Spain-Inspectores, 36183-1. 19 special focus on the total amount of cancellations. The initiative was ultimately frustrated by a lack of collaboration from the inspectors. The Swiss company’s attempts to gain more transparency and to improve control over agents clashed directly with working procedures based on tradition. Given these circumstances, the need for greater control of agencies and the way their production was organised was clear to managers prior to the Spanish Civil War. The transition to a branch system based on local offices with salaried staff, effectively began when the conflict broke out. The main goal was to implement a structure that would protect and favour the company’s interests by reducing administration and transaction costs while ensuring control over agents. 5. Discussion and conclusion From the first stages of development of the insurance industry, the choice of distribution system has been a strategic decision with profound effects on the company’s results. The density and extent of the distribution networks determined the capacity of insurers to connect with the different centres of demand and to choose the insurable risks of developing economies. In the Spanish case, the dispersion of the demand and the relative backwardness of insurance with respect to other markets magnified the importance of distribution strategies, while the changing regulatory environment contributed to shape their implementation. Moreover, the shortages of price competition in major lines and the trend towards general insurance companies converted distribution and sales networks into a decisive factor in the success or failure of insurers. Indeed, from the late nineteenth century onwards, the development of a network of agents accompanied the main lines of insurance and enabled their growth. Despite its higher costs in the long term, the free agency model worked as a driver for sounding and testing the market, and it certainly enabled firms to establish themselves quickly and then rapidly build a portfolio of policyholders, although in exchange for higher policy cancellation rates and, in some cases, above-average loss ratios. This was the case of the main foreign companies in Spain, whose entry and longterm results were closely dependent on the agents they chose to represent them in the country and the commercial culture promoted by the firm. For the Sun Insurance Office, a prudent and conservative approach resulted in a long search for a suitable representative in Spain, who finally proved to be fundamental to the company’s expansion in this country. Furthermore, in spite of diverging interests and conflicts between the head office and the agent, the strategy proposed by Basterra of specialising in the fire branch and expanding into the entire territory ended up determining the success and continuity of the 20 company in the Spanish market. In the case of the Equitable, the aggressive style of the American insurer and the selection of Rosillo as its main representative in the country marked an explosive growth in Spain. Nevertheless, the unbalanced performance of the company’s portfolio marked a conflictive relationship until its withdrawal. Agency theory helps to better understand the representative’s role in insurance distribution. The main goal of the firm was to get a sound risk portfolio that assured constant cash flows from an almost unknown market. To do this, the company appointed a representative in the country, the agent, who was the face of the firm, but who also had private (and divergent) interests. Hence, while company knowledge of the market relied almost exclusively on the information received from the agent, the latter could operate following his own interests, even against the firm’s interests. This could be done, for instance, by selling more policies without making a careful selection of policyholders, or by pursuing a doubtful expansion of the network. In this respect, firms could only deal with the problem of information asymmetry and the emergence of moral hazard by allocating more resources to the control of independent agents. In the case of the Sun, the company was willing to keep its representative Basterra under control, even when this entailed higher operating costs. The Equitable, however, was not so rigorous with respect to the agent’s management of the portfolio. Moreover, the firm even boosted the risky practices implemented by the Rosillo brothers through its commissions policy, in such a way that the company effectively accepted the lack of control and information in exchange for high rates of return. Despite these high levels of profitability, the increase in monitoring costs reflected by higher administrative expenses would be the main obstacle to extending control mechanisms over agents. Indeed, the growing importance of these networks had direct repercussions on the cost structure of companies. Furthermore, the expense of monitoring agents would have cast serious doubts on the adequacy of using independent agents instead of salaried staff. Certainly, the underlying conflict of interests between agents and companies resulted in increasing agency costs which reduced the advantages of this system. As a result, the Equitable avoided any conflict by ceding the risk portfolio to the Rosillo family. Meanwhile, the Sun moderated its trend of growth, in such a way that its Spanish business came to a standstill in the 1920s and 1930s. As a consequence of the rise in monitoring costs, firms aimed to control the management of distribution channels. In this context, insurers opted for different solutions: mutual societies tried to promote the role of members as potential distributors 21 of their products whereas many companies favoured the creation of their own branch offices in order to reduce the costs derived from agent autonomy. In the Spanish case, this general trend towards the branch system was accelerated by changes in the regulation of insurance company investment portfolios, which boosted the acquisition of real estate properties and favoured the establishment of local branches. In contrast, the reluctance of most foreign companies to immobilise financial resources in a period of uncertainty, led them to keep their agent-based organisation or, in the case of several American and British firms, to reduce their operations in Spain to a minimum or to withdraw. Beyond this overall dynamic, the introduction and spread of the branch system added complexity to distribution networks. For Mutua General de Seguros, the creation of its own branch offices was intended not only as a way of reducing information asymmetry and, in particular, the costs of controlling the company’s distribution network, but also as a means of underpinning territorial expansion to other regions of Spain. In the case of the Zurich group, the shared use of Hispania’s sales network enabled the productivity of the network to be maximised and facilitated the diversification of the group into other business, such as entry into life insurance through Vita. However, the increasing costs of monitoring the independent agents led to the transition to the branch system and the internalisation of commercial functions. Indeed, while the network of agents absorbed by Zurich served to launch its operations in the country, the continuous increase in the costs resulting from monitoring and controlling agents soon forced the company to reorient the commercial function towards the branch system. Since agents within the company network were not willing to modify their corporate practices, the actual benefit of sharing a distribution network disappeared due to the costs of inspection procedures and the high rates of policy cancellation. In summary, in the case of highly internationalised markets, legal changes such as the inclusion of real estate properties within the calculation of the compulsory reserves of insurance companies did not only influence investment policies but also the distribution strategies managed by firms. 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