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 article argues, undermines competition among consumer insurers with respect to non-price product attributes. This, in turn, increases the risk 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 article suggests that insurers who rely on independent agents to sell consumer lines of insurance should be prohibited from paying different rates of compensation to different agents for the sale of the same line of insurance.

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