Differential Compensation and the 'Race to the Bottom' in Consumer Insurance Markets

Abstract:     
This contribution to a symposium on insurance intermediaries analyzes insurers' compensation of independent agents and brokers in consumer markets. It focuses on various forms of "differential compensation," whereby an intermediary's compensation differs depending on the insurer with which the consumer ultimately purchases coverage. Such differential compensation, the Essay argues, undermines competition among consumer insurers with respect to non-price product attributes. This, in turn, creates the prospect of a "race to the bottom" in consumer insurance markets, as insurers focus on selling the cheapest coverage possible that is consistent with legal restrictions. To address these problems, this Essay suggests that insurers should be required to offer all independent agents that sell their policies a single, flat premium commission rate for each line of coverage.

Keywords: Insurance, Commissions, Contingent Commissions, Agents, Brokers, Intermediaries

Accepted Paper Series