The end of the year may be a good time to get your financial life in order, but it’s the worst time of the year to buy insurance for your car or home. When hearing this advice, most people ask, “why?” The answer lies in the conflicts of interest the compensation programs insurance companies utilize have created for agents.
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Many car and home insurance agents get bonus payments based on a combination of three things:
- How much insurance they sell (like any commissioned sales person)
- How much insurance they sell with a particular carrier
- The magnitude of the losses (claims) filed by their clientele
The Price of the Insurance
Commission based compensation is an insurance industry standard practice. The risk for consumers is the sales person guiding the decision making process is incentivized to sell unneeded or overpriced insurance in order to increase the commissions received. We’ve met a lot of agents and are confident most would not do this. However, without any form of transparency, consumers don’t know. The lack of transparency breeds distrust.
Why not to buy insurance in November or December?
The end of the year is bonus time. Insurance companies offer bonuses based on how much business the agent places with them. This means if you buy insurance at the end of the year, you are likely to be placed with the company that offers the best bonus. Unfortunately, this could be very different than the company that offers the best protection or the best price. Consumers can avoid this problem by insisting on being placed with one of the best companies. If you have a great insurance company, who cares if the agent gets paid well. What you want to avoid is poor insurance that offers heavy incentives to agents to sell a lousy product.
Your Agent May Not Want You to File a Claim
Most consumers find it hard to believe the agent that sold them insurance may not want them to file a claim. Unfortunately, based on commonly used compensation systems, this may be true. This fact is true year-round. However, late in the year it can become especially true.
The reason for this is agents can earn bonus payments based on their clients not filing claims. Late in the year your agent could be on the verge of earning a nice bonus, except you have a claim to file.
A Compensation System That Needs Transparency
In any industry, compensation systems that create a conflict of interest between buyer and seller should be disclosed. Clearly the compensation structure of the insurance industry involves conflict. However, that’s the reality and is unlikely to change. To change such the system requires consumers demanding transparency. Unfortunately, it’ not realistic that either transparency, or a new compensation system will become reality any time soon. Therefore, the only alternative is consumer education. Tell your friends and family about this and similar issues we report here at ValChoice.
The best way to avoid issues with insurance is to work with the best companies. We find that the best companies have both strong management as well as a culture of doing what’s right for customers. These companies tend to hire others that are like themselves. That’s why we work to support agents of the best companies to grow their business.
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