It’s about Building a Book of Business: Incentives of Insurance Salespersons from Future Renewals

Abstract

Most property-liability insurance contracts are short-term contracts which can be renewed at expiration. With an average policy renewal rate of 89%, selling a policy not only generates immediate revenue, but also results in expected future revenue for an agency. Outside employment options give salespersons negotiating power to claim a fraction of their increased production. This link between current performance and future compensation creates implicit incentives. Our empirical analysis documents a strong positive relationship between the fraction of renewals and salespersons’ output, and between output and salespersons’ compensation. These results hold regardless of whether salespersons receive a fixed salary, a combination of salary and commission, or compensation entirely based on commission. Overall, these findings support the view that property-liability insurance salespersons have strong incentives to build a book of business, and that these indirect sales incentives allow insurance agencies to offer compensation schemes with a fixed salary component.

Keywords: Compensation Schemes, Incentives, Career Concerns, Insurance Salespersons

JEL Classification: G22, J3, J22, J00