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A study raises questions about contingencies

THE INVESTIGATION of contingency payments that started last year in one way or another will affect even the smallest independent insurance agency-and probably every insurer and general agency using independent agents and brokers. These investigations

By Chris Burand | Updated on March 31, 2005

THE INVESTIGATION of contingency payments that started last year in one way or another will affect even the smallest independent insurance agency-and probably every insurer and general agency using independent agents and brokers. These investigations focus on whether these various incentives have prompted agents and brokers to improperly steer clients to carriers that provide the best contingency bonus to them, rather than offer the best coverage or price to their clients.

Some in the insurance industry, myself included, have contended that true performance-based contingency contracts benefit all parties involved. The most important factor affecting bonuses in performance-based contingency contracts is loss ratio. (The bonus also can be affected by volume, growth and retention, however.) When an agency can earn a bonus based on performance, the agency encourages insureds to practice loss control, which, if successful, reduces the insureds’ insurance cost (plus they avoid all the uninsurable costs associated with claims-e.g., time spent on defense). When clients experience fewer, smaller claims, the agent’s loss ratio drops, which generates a bigger profit-sharing bonus for the agent. With lower loss ratios, insurance companies pay less for claims, so their profits increase. Everyone wins.

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