The Evolution of Compensation Management System in a Changing Economy
When the average person thinks of insurance, they have an effective preconceived idea as to how to shop and purchase a policy, have coverage, or get administrative questions answered, and what to do in the event of a claim. But it wasn’t always that easy to navigate the insurance-buying process.
From that early beginning—when insurance companies contracted with individuals to work as agents—to today, the primary way people manage their insurance affairs is by working with an agent. Yes, direct-writing carriers have their own exclusive agents, and companies use independent agents as their representatives. Nonetheless, whether an insurance buyer is working with an independent agent or a direct-writing agent, the insurance transaction will result in an agent getting paid. Unfortunately, that simple act of paying an agent a certain percentage of the premium isn’t that simple. In fact, it can be mind-numbingly complex.
The modern insurance system, which evolved from the pioneer days of the 1800s, is full of complexities and nuances that are quite difficult for the layperson to understand. In fact, most people who work in insurance, including regulators, don’t have a complete understanding of how the U.S. insurance industry operates. The insurance industry has three main segments: life insurance, property & casualty insurance, and health insurance. At one level, it is all insurance, but at another level, the property & casualty business has little in common with life insurance, and health insurance has little in common with either the life or property & casualty segments.
Property & Casualty
Property & casualty companies have traditionally paid agents and agencies a simple percentage of premium by line of business or coverage, which worked well for decades. But over the past 25 years, profit share or contingent commissions started to come into play.
Life and Annuities
Where the property & casualty segment of the insurance industry opted for a percentage of a premium with directly appointed agents, the life and annuities segment had a very different approach to distribution
In the overall insurance marketplace, distributors are unique because they don’t underwrite any insurance, pay claims, or provide policyholder service. What distributors do is access thousands of agents who can sell and service a variety of insurance products.
Health insurance companies are much like property & casualty companies when it comes to managing agent commissions. For health companies that underwrite individual health and related products, commission processes mirror that of typical property & casualty companies. The norm is to pay a percentage of the premium as commission. That commission may have some overrides or bonuses attached, based on persistence/renewal rate, premium growth, unit volume, and so on. In the individual health business, a rapidly emerging area is worksite benefits where the health insurance agent provides certain voluntary insurance products as part of the employers’ group health insurance program