UNDERSTANDING THE INCENTIVES OF COMMISSION MOTIVATED AGENTS IN LIFE INSURANCE: THEORY AND EVIDENCE FROM INDIAN LIFE INSURANCE

UNDERSTANDING THE INCENTIVES OF COMMISSION MOTIVATED AGENTS IN LIFE INSURANCE: THEORY AND EVIDENCE FROM INDIAN LIFE INSURANCE
2012-Shahid Vaziralli, Shawn Cole (HBS) , Santosh Anagol (Warton School , University of Pennsylvania), Laura Litvine (UCL)
Lead Center : Centre for Microfinance (CMF)
Focus Area :Insurance & Pensions

In this study, researchers explore why people prefer whole insurance over term insurance when the latter may yield large benefits. One possible reason for the popularity of whole insurance may be the incentives scheme insurance companies provide their agents. In other words, it is possible that insurance companies and sales agents oversell whole insurance since agents earn higher commissions on sale of whole products. However, there could be a few other reasons why consumers make this choice; such as loss aversion and clients’ inability to measure compound interest. The study tests possible explanations as to why people make sub-optimal purchase decisions.

Financial products in developing countries are primarily sold through agents who are compensated through sales commissions. In an environment where customers may lack the information and financial literacy to make informed product choice decisions, agents are expected to serve as advisors as well. In this study, researchers ask whether motivating agents with commissions is the best way to incentivize them to sell products that are welfare-maximizing to the consumer. The market for life insurance in India is the ideal testing ground for this hypothesis for several reasons;1) The market is very large, with approximately 44 billion dollars in premiums collected in 2008, 2) all sales are executed through the commissions motivated agent channel and 3) it is a complex product, and consumers require help in making decisions.


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In this study, researchers explore why people prefer whole insurance over term insurance when the latter may yield large benefits. One possible reason for the popularity of whole insurance may be the incentives scheme insurance companies provide their agents. In other words, it is possible that insurance companies and sales agents oversell whole insurance since agents earn higher commissions on sale of whole products. However, there could be a few other reasons why consumers make this choice; such as loss aversion and clients’ inability to measure compound interest. The study tests possible explanations as to why people make sub-optimal purchase decisions.

Financial products in developing countries are primarily sold through agents who are compensated through sales commissions. In an environment where customers may lack the information and financial literacy to make informed product choice decisions, agents are expected to serve as advisors as well. In this study, researchers ask whether motivating agents with commissions is the best way to incentivize them to sell products that are welfare-maximizing to the consumer. The market for life insurance in India is the ideal testing ground for this hypothesis for several reasons;1) The market is very large, with approximately 44 billion dollars in premiums collected in 2008, 2) all sales are executed through the commissions motivated agent channel and 3) it is a complex product, and consumers require help in making decisions.