WASHINGTON–An agents group said a study has shown that contingency commission payments are key to keeping the independent agency system in place and ensuring the survival of smaller and midsize insurers.
The Independent Insurance Agents and Brokers of America said that was the conclusion of a research project it paid for conducted by Robert Hoyt of the Terry College of Business at the University of Georgia with Randy Dumm and James Carson of the College of Business at Florida State University.
IIABA's study arrives in the wake of an agreement by St. Paul Travelers to settle complaints in three states over price-fixing and accounting misdeeds by agreeing to drop the commissions and pay $77 million to New York, Illinois and Connecticut in fines and customer reimbursement.
Authorities charged that the insurer paid the commissions as part of a scheme to reward brokers that steered customers its way in an arrangement that involved price-fixing and bid-rigging.
But researchers on the IIABA study said despite criticism of the contingent commissions as being harmful to insurance buyers and compromising the insurance placement process, they found that contingent commissions are not "inherently bad for consumers and can actually help align the insurers' incentive with those of the agent."
"Properly structured contingent compensation arrangements seek to reward the intermediary for various activities," they wrote, including bringing properly priced and underwritten business to the insurer, helping to maintain existing business, helping to grow the insurer and managing losses.
"In addition, contingent commission structures provide incentives for the producer to assist the consumer in 'improving' the risk," their report said.
The report found that "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."
Overall, the study found that contingent commissions provide an amount of revenue that is "neither substantial nor insignificant"–roughly 5.4 percent of revenues for smaller firms and 8 percent for larger firms.
However, the revenues contingent commissions provide play an important role for agencies that are increasingly finding administrative costs for operations, such as policy or applications processing, shifted from the insurers to their office.
"In order to maximize the future income stream and the accompanying agency value, the agent needs to ensure that he/she retains existing customers while acquiring new business," the professors wrote.
Their report said, "While price plays an important part in the consumer's decision to renew business with the agent, the consumer's renewal decision also is based on the value of the services that the agent provides. Contingent commissions provide the potential revenue to cover the cost of providing these services in-house."
By helping to maintain the independent agent system, the study found that insurers also help maintain a viable competitive insurance marketplace, specifically in ensuring the existence of small and midsize companies.
"These insurers would incur significant additional costs if not for the existence of the independent agency system," they wrote. "If these insurers were to exit the market, the result would be reduced underwriting capacity and increased premiums."
The study found the impact for consumers of a reduced independent agent system would be most severely felt in rural areas.
"Geographically it is difficult for insurers to support a captive agent in less populated areas," the professors wrote in the study. "Therefore, independent agents play a critical role in serving the needs of businesses and consumers in these areas."
Ultimately, any compensation system can be abused, the professors concluded in the study. However, they found that a properly administered contingent commission program "serves a legitimate business purpose that helps to align the interests of the parties that are involved in the insurance transaction."
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.