Actuarial Considerations in the Development of Agent Contingent Compensation Programs

Many insurers have developed contingent compensation programs for their agents. Traditionally these programs have been used to motivate agents by providing higher commission percentages or "bonuses" to those agents with low loss ratios, higher written premium volume or both. More recently insurers are adding other factors into the contingent compensation programs including business retention and cross-selling. Many of these plans do not properly motivate agents because of flaws in their design. More recently some plans have been constrained by statute, notably in Michigan and New Jersey. By introducing some fairly standard methods and techniques, actuaries can assist companies in the design of agent compensation plans that provide proper incentives to agents. In this paper, we discuss some of the elements of effective plans. The elements include: - Utilization of accident year data and accounting for IBNR losses; - Large loss adjustments; - Catastrophe adjustments; - Combining multiple lines (e.g., auto and home insurance); - Expense flattening; and - Legal issues. For each element, the paper outlines options for handling these issues. Also, the paper provide hypothetical examples of the calculations of the factors and loads for the adjustments.