Dilemmas on Profit Commission
The use of profit commissions for insurance agents and agencies is very common and is intended to be an incentive for them not only to increase sales but also to try to get good policyholders.
One of the main dilemmas that generate conflict between insurers and agents is how and when to calculate that profit. Insurance is an ongoing business and claims in many cases take time to develop. That was the case of a large insurance company that, due to not well defining the formula and the time, paid unwarranted profit commissions due to miscalculation.
The original formula took into account changes in outstanding claims:
You can see in the table that the profit loss (Accounting P/L) calculations are based on accounting movements. The particular case was that thanks to the efforts of a law firm, it was possible to close some lawsuits for much less money and thus reduce the outstanding claims, generating a “fictitious” profit for the agencies involve.
In the two first rows, you can see the effect of large reductions in outstanding claim estimates that produced fictitious profit and led to the insurer paying a profit commission when profits simply meant a reduction of past losses.