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Effect of Contingent Commissions on P&C Prices
The Situation
Insurance intermediaries came under a spotlight in 2004 when it became public that the New York Attorney General’s office was investigating major insurance brokers’ compensation practices and contingent commissions in particular. Numerous investigations and lawsuits followed, many alleging that contingent commissions caused the increase in insurance prices experienced in various lines around 2001.
NERA's Role
A Fortune 500 company engaged NERA to conduct a study to assess the impact of contingent commissions on insurance prices. The theoretic academic literature suggested that contingent commissions might be efficiency-enhancing but might also be used in particular circumstances to increase premiums without efficiency gains. The accompanying statistical analysis, however, was affected by omitted variables and other measurement problems. NERA experts developed statistical analyses of insurance premiums and contingent commissions, using two approaches to try to isolate the effect of contingent commissions on insurance prices in analyses that overcame several data and measurement problems.
The Result
NERA’s analyses demonstrated that there was no statistically significant relationship between contingent commissions and overall insurance prices. The analysis also demonstrated that findings that contingent commissions increased prices came from the use of flawed models. When certain relevant factors were omitted from the analysis, this flawed model did have a statistically significant relationship between contingent commissions and insurance prices. The NERA analysis was used to help refute claims that contingent commissions had been used to raise insurance prices.