Contingent Commissions and the Management of the Independent Agency

24 Pages Posted: 26 Sep 2016

See all articles by Robert Puelz

Robert Puelz

Southern Methodist University (SMU) - Real Estate, Insurance, & Business Law Department

Date Written: Fall 2016

Abstract

Insurance agencies continue to exist as an important distribution mechanism because they give their contracting insurers advantages in risk selection and enable insurance applicants to transfer complex risks. While independent agencies are compensated by upfront commissions, a key component of their profitability is tied to contingent commissions. A contingency arrangement represents ex post compensation normally tied to underwriting profitability, volume, and annual growth. We report two actual contingency contracts in the context of a decision process for choosing among contingency offerings by insurers. We incorporate both uncertainty and correlation among key variables to arrive at values for competing contracts, then use a downside risk approach that helps agency owners select the better contract. The approach offered in this article is scalable to a selection problem for any number of contingency arrangements.

Suggested Citation

Puelz, Robert, Contingent Commissions and the Management of the Independent Agency (Fall 2016). Risk Management and Insurance Review, Vol. 19, Issue 2, pp. 225-248, 2016. Available at SSRN: https://ssrn.com/abstract=2842878 or http://dx.doi.org/10.1111/rmir.12060

Robert Puelz (Contact Author)

Southern Methodist University (SMU) - Real Estate, Insurance, & Business Law Department ( email )

United States
214-768-4156 (Phone)
214-768-3713 (Fax)

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