Contingency fees and incentives in commercial lines insurance

This dissertation addresses the potential agency conflicts arising between an insurance broker and its commercial clients. Though the broker is hired to find its client the best insurance quote on the market, the broker's contractual arrangements and private information may lead it to stray from this ideal. The first chapter introduces the institutions of commercial lines insurance in the interest of providing a foundation for the empirical inquiries to follow. The second chapter asks whether contingency fees, which are annual payments rewarding the broker for attaining premium volume and profitability targets with an insurer, distort the broker's sales behavior. The analysis uses data on policies written through a privately-held insurance broker in Arizona from 1994 to 2000. I am able to identify the effect of contingency fees because individual agents working at the broker make placement decisions, and only some agents have an incentive to respond to this compensation. Contingency fees are found to distort sales toward insurers that have contracts in effect at the broker. Moreover, agents appear to respond to contractual nonlinearities and are more inclined to place business with insurers offering high marginal incentives. The third chapter asks whether the broker can effectively communicate its private information to the client if it is in the broker's immediate interest to avoid costly search. The client would like the broker to search if the client's current insurer is no longer pricing its coverage competitively. In contrast, the broker would like to avoid costly search, while retaining the client.

Department dc:contributor.department

Massachusetts Institute of Technology. Dept. of Economics.

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2002

Author dc:creator

• Wilder, Jeffrey Mark, 1974-

Advisor dc:contributor.advisor

• Sara Ellison and Glenn Ellison.

• Economics.

Statement dc:rights

• M.I.T. theses are protected by copyright. They may be viewed from this source for any purpose, but reproduction or distribution in any format is prohibited without written permission. See provided URL for inquiries about permission.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/1721.1/17550

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/17550