While companies are signing agreements to limit contingent commissions, a study funded by the Independent Insurance Agents & Brokers of America concludes that such payments ensure the survival of smaller and midsized insurers.
The study on the role of producers and compensation in the insurance industry was conducted by Robert Hoyt of the Terry College of Business at the University of Georgia, along with Randy Dumm and James Carson of the College of Business at Florida State University. The study obtained by National Underwriter was completed in May.
The professors found that contingent commissions are not "inherently bad for consumers" and can actually help align the insurers' incentives with those of the agents.
"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," they wrote. "That 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."
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 offices.
"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. "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 ensure a viable competitive insurance marketplace, specifically in ensuring the existence of small and midsized companies.
"These insurers would incur significant additional costs if not for the existence of the independent agency system," they wrote.
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."
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