What matters gets rewarded. What's rewarded gets done.
Incentives influence behaviour. They better. They also create side effects.
- the US rewarded farmers for growing corn for ethanol, which boosted water consumption and food prices: "controversial because of the amount of land required to grow the crops, and because of its effect on food prices and water resources." (see Columbia University, Jan 2011)
- the US No Child Left Behind focused teachers test scores instead of general learning: "NCLB encourages cheating and gaming the system" (Fortune, Dec 2010)
- bonuses motivate employees to ... earn bonuses, rather than take actions of longer benefit for their companies (see accounting scandals in Wikipedia)
If customers line-up outside your door, you'll likely get paid a salary. You might get incentives to sell profitable upgrades like extended warrantees but that's about it.
An Exception
The insurance world is unusual. For car and home insurance, insurers want to encourage ongoing service. Level compensation helps. Besides, you know you need coverage and may even be legally required to buy minimum amounts. The demand reduces the effort required to make the initial sale. The result is lower compensation.Life insurance is different. As the Globe & Mail reported, hidden incentives to advisors create conflicts and you lose (see what your insurance broker doesn't want you to know). The products are considered to be sold, not bought. Selling is also considered difficult. Insurers feel it's easier to motivate the salespeople than the buyers. That's why insurers pay most of the compensation at the time of sale. This leaves very little for future years.
The Side Effect
What suffers? After-sales service.The insurers argue that the heaped compensation includes payments for ongoing service. The advisors feel they earned all the compensation by making the sale. Whoever wins this tug of war, you lose.
Where's the incentive to provide after-sales service?
If you cancel your coverage during the first 2-3 years, your advisor gets blamed for a poor quality sale and part of the compensation gets clawed back/reclaimed. Recoveries help the insurer offset the costs of issuing the coverage (underwriting, administration, compensation). In future years, your advisor earns more by selling you new coverage or replacing your current coverage. Maybe you've experienced this yourself? The phone rings and your wallet quivers.
Also, advisors quit. Your policy becomes an "orphan". Your new advisor has an even stronger incentive to sell new coverage since he or she received nothing from the original sale. You're called a lead. If your advisor retires, the purchaser looks at the potential for new sales too since you're a "warm lead".
Your Recourse
What can you do? Before you buy, ask your advisor about ongoing service. Don't accept talk and vagueness. Look for proof. What are the processes and systems? How often do post-purchase reviews take place? See what you get. Are you satisfied?Links
- Going beyond the insurance loophole
- What your insurance broker doesn't want you to know (Globe & Mail, Dec 2010)
- The best way to measure intent
- Reasons to be cynical
- image courtesy of Becki Kishimura (UK)
Podcast 112 (4:07)
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PS Pre-sales service is a poor predictor of future service.
3 comments:
This is a great post and it cuts to the heart of the failures of the insurance business. Insurance is sold, not bought. That very expression suggests that insurance purchases are not always in the best interest of the sold party. Add to that fact that insurers need to provide such heavy seller incentives casts doubt on the need for the products in the first place. Whether this is true or not is immaterial - the way the industry is organized suggests an underlying problem.
A restructuring of the compensation framework to encourage better ongoing service would be a step in the right direction.
Thanks for your insights, Jay.
The view that insurance must be sold belittles the public's ability to understand and act.
There are compelling reasons to buy life & health insurance. Why not educate and provide the opportunity to buy? There will be challenges such as numeracy. There will also be solutions. More ongoing service would also help.
I also noticed this practice of insurance agents. They are more concerned in closing the sale as soon as possible by employing sleek sales tactics. Once you are sold, you are now on your own. Cancelling immediately after this realization will require you to pay charges.
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