The purpose of this study is to find out if contingency commissions are appropriate, at all “harmful to insurance buyers and if they compromise the process by which insurance is placed with insurers.” Contingency commissions are defined in the paper as, “commissions paid by the insurer to an agency that has satisfied profitability and, in many cases, retention and growth requirements.” Another important fact is contingency commissions are paid at the end of the fiscal year.
The paper finds contingency commissions “are not inherently bad for consumers (i.e. policyholders) and, in fact, can help to align the incentives of the insurer with the agent.” Listed below are ways contingency compensation plans reward the intermediary for various activities:
- Bringing accurately priced, properly underwritten business to the insurer;
- Assisting the insurer in retaining existing business;
- Promoting the growth goals of the insurer;
- Managing the losses on business placed with the insurer.
Another benefit of contingency compensation according to the paper is “the producer is encouraged through these compensation arrangements to assist the consumer in taking proper loss control steps to mitigate the risk that the consumer faces.”
One of the reason people become an insurance agent is the many ways you are compensated. By compensating agents on the backend based on profit, retention and growth policyholders are receiving better service. Agents are motivated to assist clients and provide great service so as to keep them as clients, sell more policies and generate more profit.
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