AIA-funded study says bonus system might stimulate competitive bidding
Contingency commissions, when administered properly, can actually benefit clients, say two academics from the Wharton school in Philadelphia, but an industry critic dismissed the report as "bogus."
In their report–"The Economics of Insurance Intermediaries"–Professors J. David Cummins and Neal A. Doherty, both with the Wharton School at the University of Pennsylvania in Philadelphia, contend that contingent commissions are not necessarily bad, and can benefit the industry.
In the 51-page report–funded and released by the Washington-based American Insurance Association–the professors researched the question of compensation paid to brokers and agents (which they call intermediaries) and concluded that contingency commissions can "stimulate competitive bidding."
They said that contingent commissions, primarily profit-based, serve the purpose of aligning the interests of insurers with producers. When the interests are aligned, the professors said, the insurer has more confidence in the information provided by producers and in selecting risks.
This breaks the "winner's curse" (inadequate underwriting), they said, and encourages carriers to bid more aggressively on risks.
The professors said their research concluded that contingent commissions generally account for no more than 5 percent of a broker's revenue, and that most commissions are passed onto policyholders through the premium.
"However, whether this harms or benefits policyholders is a matter of debate," they wrote. "Despite recent allegations that contingent commissions are a 'kickback' from the insurer that compromises the intermediary's obligations to its clients, such commissions actually can be beneficial to clients."
They added that the "integrity of the bidding process" is vital to the health of the industry and a distinction needs to be made between legal and illegal contingent commissions when discussing the process.
The study was based on interviews with producers and industry executives and available industry data.
Debra Ballen, AIA executive vice president for public policy management, said the organization asked the professors about six months ago to put together the report after AIA found no academic studies on the subject. She said the professors were asked only to study the subject, and were free to draw their own conclusions.
Ms. Ballen said the hope is that the study will justify the role of producers in the insurance process and provide future researchers information "about the important role of intermediaries."
A staunch critic of the industry, J. Robert Hunter, director of insurance with the Washington-based Consumer Federation of America, dismissed the report.
"The 'study' is bogus," he wrote in an e-mail. "There is no real analysis in it, just conclusionary statements that agree with AIA (no surprise since they paid for it)."
He further disputed the report's conclusions, contending that there is no real competition in the industry.
Ms. Ballen said that the integrity of the professors is beyond question, adding that they would not damage their reputations by producing a biased report.
"They are neutral academics who have a philosophy that is their own and not ours," she said. "This is a good, solid report that will educate anybody who is interested in this issue."
Quotebox, with Hunter mug:
"The 'study' is bogus. There is no real analysis in it, just conclusionary statements that agree with AIA (no surprise since they paid for it)."
J. Robert Hunter, Insurance Director
Consumer Federation Of America
Quotebox, with Ballen mug:
"They are neutral academics who have a philosophy that is their own and not ours."
Debra Ballen, Executive Vice President
American Insurance Association
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