Agents Could Benefit from Incentive Pay Plans Replacing Contingent Income

February 22, 2007

Incentive pay plans for agents that some insurers are implementing to replace discontinued contingency compensation could work out better for agents than the programs they are replacing.

A handful of major carriers banned the use of contingent commissions at the beginning of 2007. Travelers and Chubb were among the insurers that announced plans to replace contingent commissions with new supplemental compensations programs in 2007.

At the end of the day, the new compensation programs could work out even better for agents and allow them to know sooner what their year-end bonus might be, according to agent association leaders.

At the same time, the leaders urge insurers that have not altered their agent compensaton strategies to hold off on doing so.

Insurance Journal conducted an exclusive video interview with Bob Rusbuldt, chief executive officer of the Independent Insurance Agents and Brokers of America and David VanDelinder, executive director of the Independent Insurance Agents of Texas, at the 44th annual Joe Vincent Management Seminar in Austin, Texas. Rusbuldt and VanDelinder shared their thoughts on the future of agency compensation.

The entire video interview can be seen online at www.insurancejournal.com/broadcasts.

“Agents will be able to plan for the future. They will know at the beginning of the year what their bonus check will be at the end of the year,” Rusbuldt said of the new plans. With many current contingency programs, agents do not know what they will get at the end of the year because they don’t know if they’ll be profitable.

While agents seem to say, “so far, so good,” Rusbudlt says, many maintain a more “wait and see” approach.

“They want to wait and see what their factors are going to be and see how this is going to work over the course of 2007,” he said.

IIAT’s VanDelinder added that despite the change in compensation, the new programs from both Travelers and Chubb will continue to compensate agents for “exactly the same performance that they did under the old compensation agreements,” including growth, profitability, retention and other factors. “So there is really no change in the basis of that compensation,” he said. “It’s really a change in the manner in which it’s paid.”

“There still is incentive to this,” Rusbuldt said. “The good agencies, the profitable agencies, will be rewarded.”

Whether other carriers will follow suit and change their compensation structures remains to be seen, Rusbuldt said.

“I’ve received a number of calls from super regionals not involved in any of the investigations,” Rusbuldt said. “I advise them that they should wait and see how this unfolds in the market place. … There’s no rush for any of these companies to enter into any new supplemental compensation arrangement, but it may be the right thing to do.”

VanDelinder says agents in Texas are a bit edgy.

“These companies are tampering with a very important part of their compensation,” he said, noting a recent best practices study found that more than 80 percent of pre-tax profit in an average agency is attributable to incentive compensation. “It makes agents very nervous.”

When it comes to compensation disclosure and transparency, Big “I’s” Rusbuldt says he’s concerned about creating vast inefficiencies and burdens on agents.

“If you have 10 carriers in your agency, with 10 different disclosure requirements, 10 different disclosure forms, it could create incredible inefficiencies,” he said.

“Plus it’s patently unfair that insurance agents should be singled out to disclose compensation during a sales process which is a sensitive time in dealing with a new customer,” VanDelinder added. “I don’t know of an agent that would deny that information if a customer asked for it,” he noted. But the issue of disclosure is not a consumer-driven issue, he said. “Our agents have not heard from their customers about this issue at all.”

“Frankly, why don’t we disclose how much Geico spends on advertising if you want get to the ingredients and the factors of what composes the make up of that policy,” Rusbuldt said.

Despite a general fear of the unknown among independent agents everywhere, Rusbuldt says agency compensation, in whatever form, will work out well.

“As time goes along, I think the factors are going to be the same and I think this could all work out well for agents at the end of the day,” he said.

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