Understanding the Incentives of Commision Motivated Agents in Life Insurance: Theory and Evidence from Indian Life Insurance

This study examines how commissions influence insurance agents in revealing financial information to their customers and how customers use (or misuse) this information to make financial decisions.

Background
Agents play a major role in dispersing financial products in developing countries, with people relying heavily on them for information regarding these products. These agents are compensated through sales commissions. In such an environment, the customers are severely lacking in financial literacy and judgement to make informed product choices. Researchers have observed consistent preference for whole insurance over term insurance when the latter may yield larger benefits. A possible cause for this popularity may lie in how insurance companies incentivise their agents. This study explores how financial incentives motivate agents to leverage their influence on their customers towards taking certain financial decisions. It also tests possible explanations to understand why people make sub-optimal purchase decisions.
Approach
The study design included a field and lab experiment to test behavioural factors that lead to purchase decisions for this study. The field experiment, a randomized controlled trial, takes the form of an audit study). It employed “mystery shoppers” who were provided with scripts and personas which varied in their level of knowledge about financial products. The mystery shoppers Approached insurance agents with an interest in investing in insurance schemes. The study was conducted in Ahmedabad (Gujarat) and Chennai (Tamil Nadu). Five such mystery shoppers completed 229 audits (meetings with life insurance agents to collect data without the agent’s knowledge) in Ahmedabad and 594 audits were compiled by four mystery shoppers in Chennai. Additionally, researchers also conducted a lab experiment that tested consumers’ behavioural biases. The experiment, also a randomized control trial, invited people to attend a session where they watched a randomly assigned video followed by a short survey to assess their preferences.

Key Findings

Results from the study indicate that insurance agents do provide misleading advice to clients, their recommendations heavily reliant on associated commissions from their employers. recommending products that are not suitable for the customer. Even in cases where the customer expressed a preference for term insurance, most agents advised against it and instead recommended whole life insurance products by giving customers misinformation about term insurance. This indicates that for life insurance, which is a large and important savings cum insurance product in India, that agents primarily work to maximize their commissions and play little role in educating the public about optimal decisions.

Implications
These results suggest a need for regulation to ensure that the private sector’s own incentives do not compromise the quality of financial decisions made by private individuals. This issue is of particular importance emerging markets where new investors have little experience with formal financial products to begin with.

Thematic area

Financial Inclusion

Project Leads

Shawn Cole, Santosh Anagol

Location

Gujarat, Tamil Nadu

Status

Completed