Competing for the Effort of a Common Agent : Contingency Fees in Commercial Insurance

Many insurers pay insurance agencies annual contingency fees, or bonuses, for profitable sales in excess of stipulated sales targets. This paper asks whether the prospect of such contingency fees influences an agency's sales among competing insurers. The analysis makes use of data on sales by individual insurance agents working for a privately-held insurance agency from 1994 through 2000. Identification turns on the observation that only some agents in the sample, those with an ownership stake in the agency, have an incentive to respond to contingency fees. The remaining agents serve as a control group. In a series of mixed logits, the sales patterns of the two types of agents are contrasted. The paper finds agents with equity positions to be more likely than those without such positions to write insurance with insurers offering contingency fees. The effect is found for new sales, as well as renewals, and is particularly pronounced for accounts which are identified as being more susceptible to sales distortions. For such accounts, the analysis finds evidence that agents with an ownership stake consolidate sales with insurers with greater sales volume and more profitable sales, both of which increase the contingency fee paid to the agency