Many insurance companies give their agents year-end bonuses known as
contingency commissions, which are based on "good books of business." That boils down to policyholders who pay their premiums and who rarely, if ever, make claims. For
example, Mercury Insurance Co. pays independent agents in Florida 15 percent
commissions for new auto insurance policies. At the end of the year, if
an agent's "book of business" — essentially, all the agent's policyholders
— shows a low loss ratio and the agent sells a certain number of policies,
the agent gets a 5 percent bonus commission.
Loss ratio is the number of dollars paid out in claims divided by the number of dollars collected in premiums. Mercury Insurance officials declined to comment.
At State Farm, agents receive Quality Results
Profile (QRP) points based on the quality of their policyholders. Those
QRP points can be cashed in by the agent at the end of the year for cash bonuses and
wall plaques. To qualify for a cash bonus, an agent has to accumulate at least
30 QRP points.
Logically, the more points an agent earns, the more the bonus will be.
Points are awarded for improved loss ratios and achieving higher life insurance
policy sales. For example, State Farm's "break even" point
on auto insurance policies is a 65 percent loss ratio — if for every $1
it brings in, the company pays out 65 cents. The company's "break even"
point on homeowners insurance policies is a 55 percent loss ratio. If an
agent is able to maintain a loss ratio within his or her own book of business that
is equal to or less than State Farm's "break even" point, that agent gets 10 QRP points.
State Farm's QRP brochure provides suggestions for agents on how to increase premiums and cut costs. Agents are advised to promote so-called fringe
coverages on your auto policy — those that you can either do without
or for which you have limited use, such as auto-death indemnity or emergency roadside services
coverage — that increase the amount of premium the insurer brings in. They're encouraged to sell replacement-cost
coverage for homes, which is more expensive than actual cash-value coverage, too.
They're encouraged to push higher limits of coverage or full-coverage options. And finally, agents are pushed to offer higher deductibles and to nonrenew high-risk customers in order to reduce the company's claims payouts, which also inflates an agent's bonus check.
Greg Laird, executive administrative assistant in State Farm's agency department, would not comment specifically about the QRP, but he says that State Farm will never knowingly turn away good business, and that State Farm looks to its agents to "put quality business on the books."
Putting only quality business on the books is good for an insurer's bottom line, but rewarding agents with contingency commissions raises questions about how and to whom agents sell insurance. Here's a hypothetical example of how contingency commissions work: If your agent sells $200,000 worth of auto
insurance, he or she will get $30,000 in regular commissions. At the end
of the year, if your agent's policyholders are good drivers and don't make
lots of claims, your agent could get an extra $10,000.
Neal Montgomery, director of agency marketing at Travelers Property Casualty,
says that about 90 percent of the approximately 7,800 independent insurance agents who
sell Travelers policies receive some type of contingency commission. And
those commissions represent between 8 and 14 percent of an agency's income,
he says. Montgomery would not divulge Travelers' contingency commission structure,
but he did say that for personal lines
contingencies (auto, home, and marine insurance policies), a high volume
of premium and a low loss ratio brings the agent the maximum commission.
| But will the incentive of "maximum commissions" encourage agents to redline? |
But will the incentive of "maximum commissions" encourage agents to redline — the unethical
practice of refusing to offer insurance to someone due to age, race, or
location? Unscrupulous agents vying for lucrative end-of-year commissions
might refuse to sell you insurance if your driving record isn't that great
or if you have a history of making claims.
Whether or not Farmers agents, for example, will refuse to sell you insurance based on your history is unclear, but that seed has been planted, confirms Farmers agent Kronemann. Farmers agents receive bonuses based in part on low year-end loss ratios.
Allstate, too, has a contingency commission structure — the Plus Performance Bonus — in certain parts of the country and for Allstate's independent agency force, which numbers approximately 21,000. The criteria change yearly and are based on region, but agents receive bonus checks based on low loss ratios and having brought in a specified amount premium dollars. For example, an Allstate agent might earn as much as an 11.25 percent year-end contingency commission if his or her loss ratio is below 35 percent and he or she has sold more than $1 million worth of insurance that year. Why such a big bonus? Because it gives the agent the incentive to control the "quality" of policyholders within the company.
To be sure, an insurance company reserves the right refuse business, but should it reward its agents for not selling insurance
policies to homeowners who live in an 80-year-old neighborhood? Should the
company reward its agents for not selling auto insurance policies to young,
higher-risk drivers?
"If I'm a broker, I'm supposed to go out and get every penny my clients
deserve in a claim situation," says Krauss of the Magellan Group. But the
contingency commission creates an inherent conflict, he says, because the
more claim money the broker helps the policyholder get, the more his contingency
commission is reduced at the end of the year.
Insurers should reward their agents for good service records and high
policyholder-retention rates, says Rod Guilmette of the National Association of Professional Allstate Agents, and most do. And the question
of whether contingency fees encourage redlining "hasn't come up" within
independent agent circles, says Madelyn Flannagan, assistant vice president
of consumer affairs at the Independent Insurance Agents of America (IIAA).
"It makes sense that one might draw the conclusion that contingency fees
could lead to redlining, but most IIAA agents are interested in helping
the largest array of customers as possible," she says.
When asked if he thinks contingency commissions encourage redlining, Montgomery of Travelers says only that his company makes its stance on redlining
very clear: "We have a firm policy with our agencies about redlining, and
we remind them of it on an annual basis: We will not tolerate it."
Insurance company protocol notwithstanding, abuses of agent-incentive programs do happen. To avoid salespitches that are motivated by agent incentives, find an agent you trust and consider asking whether or not he or she participates in contests and company incentive programs. Although the agent has every right to earn a living, you need to know if your agent is making it to your detriment.
"The consumer needs to be informed of these issues and make their decisions accordingly," says former State Farm agent Gilmore. In order to make money, agents might have to sell policies their policyholders might not need, but agents also need to maintain their policyholders' trust in order to stay in business. "The agent is in a catch-22," says Gilmore. Back to page 1.
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