Reformation in Life Insurance Agents' Compensation

Abstract

From an employer's standpoint the purpose of a compensation plan is to attract, retain and motivate employees. life insurance industry has enjoyed more success with motivation than with the first two goals. Moreover, the industry's compensation plan creates a potentially serious conflict of interest between the agent and the client. This article examines several other effects of the industry's current compensation plan. article concludes with four recommendations for reform. Finding a method, or methods, to compensate life insurance agents is a problem which continues to receive abundant attention. Articles and comments on the subject appear regularly in the trade press.' subject has been given an exposition and discussion in this Journal.2 purpose of this article is to enter additional evidence into the public record,3 and shift the emphasis from the descriptive and causative aspects of the compensation problem to the prescriptive and corrective. Three distinct parties have an interest in the agent remuneration quesMark S. Dorfman is Associate Professor of Finance, Miami University (Ohio). He is Publications Editor for the Journal of Risk and Insurance. He served as special consultant to the Subcommittee on Antitrust and Monopoly, U.S. Senate Judiciary Committee. author gratefully acknowledges the help, support and criticisms of many friends in academia and the life insurance industry. All opinions and omissions remain his responsibility. This paper was submitted December, 1975. 1 Nearly every recent issue of the Life Association News, a life insurance agent trade publication has carried an article on the subject. For example, Andrew F. Kenbacher, Compensation, Life Association News, (December, 1975), pp. 105-106. Another industry trade publication, National Underwriter-Life and Health Edition, carries frequent stories on the subject. For example, Agents Want More Pay for Policy Service, National Underwriter-Life and Health Edition, (July 5, 1975), pp. 1 and 7; Robert W. Osler, The Agent Compensation System 'Just Isn't Working', National Underwriter-Life and Health Edition, (November 15, 1975), p. 2. 2 Harold J. Ingraham, Jr., Problems in Agents' Compensation, Journal of Risk and Insurance, (June, 1973), pp. 191-208. 3 author acknowledges the assistance of the members and staff of the U.S. Senate Subcommittee on Antitrust and Monopoly which gathered and made available much of the data used in this article. cooperation and assistance of Mr. Dean Sharp is particularly noteworthy. As the author was a special consultant to this subcommittee at the time the article was written, it is important to note that any and all of the opinions contained within the article are his own, and may not coincide with those of the members or staff of this committee.