The influences of sales compensations, management stringency and ethical evaluations on product recommendations made by insurance brokers

Pages26-42
Published date04 February 2014
Date04 February 2014
DOIhttps://doi.org/10.1108/JFRC-08-2012-0031
AuthorLu-Ming Tseng,Yue-Min Kang
Subject MatterAccounting & Finance,Financial risk/company failure,Financial compliance/regulation
The influences of sales
compensations, management
stringency and ethical evaluations
on product recommendations
made by insurance brokers
Lu-Ming Tseng and Yue-Min Kang
Department of Risk Management and Insurance,
Feng Chia University, Taichung, Taiwan
Abstract
Purpose – The purpose of this paper is to explore the impacts of the size and timing of sales
compensations, the management stringency of the insurer and the insurance broker’s own moral views
on product recommendations made by the brokers.
Design/methodology/approach – The data used in this research were gathered from life insurance
broker companies in Taiwan.
Findings – The results showed that the sales compensations, perceived leniency of the insurer’s
underwriting and claim policy would affect the product recommendations made by the brokers.
Practical implications – Insurance brokers are one of the most important marketing channels in
the insurance industry. However, using the insurance brokers to sell insurance may result in some
ethical problems. For example, some insurance brokers may sell insurance to high-risk customers
because the high-risk customers may prefer to buy more insurance and that means more sales
compensations can be earned. The findings of this research may have some implications for insurance
management and insurance regulation.
Originality/value – This study contributes to the understanding of insurance brokers’ responses to
adverse selection problems (high-risk customers may prefer to buy more insurance) and product
recommendation decisions. The issue has been less mentioned in the financial regulation literature.
Keywords Moral, Insurancebrokers, Product recommendation,Sales compensation, Underwriting
Paper type Research paper
Introduction
Insurance brokers are independent agent insurers who serve as mediators between the
insurers and the customers. They sell insurance for several insurers on the one hand,
and offer the most suitable insurance for the customers on the other hand. Apart from
just collecting premiums and assessing the merits of the insurance polic ies, the
insurance brokers have a duty to help the customers to make claims on their policies.
The insurance brokers also take responsibility for renewing contracts and maintaining
good relationships with the customers. Compared with the insurance salespeople that
sell insurance only for one insurer, the insurance brokers are much more independent,
and are expected to act more in the customers’ best interests (Barrese and Nelson, 1992;
Barrese et al., 1995).
However, using insurance brokers to sell insurance may result in some ethical
problems. For example, some insurance brokers may sell insurance to high-risk
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1358-1988.htm
Journal of Financial Regulation and
Compliance
Vol. 22 No. 1, 2014
pp. 26-42
qEmerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-08-2012-0031
JFRC
22,1
26
customers because the high-risk customers may prefer to buy more insurance and that
means more sales compensations can be earned. Some insurance brokers may also
introduce products based on the sales compensation they received from a specific
insurer. Selling the products with higher sales compensations would accumulate
wealth quickly for those brokers, but it could cause some trouble for the insurer and
customers in the future because the products may not meet the customers’ needs
(Boatright, 1999; Inderst and Ottaviani, 2009).
Although the adverse selection problem is a key issue in the insurance literature
(Fishback and Kantor, 2000; Dionne, 2001; Eckardt and Ra
¨thke-Do
¨ppner, 2010), it
seems that very little insurance regulation research has examined how adverse
selection problems are determined by the insurance brokers. Second, some scholars
link unethical selling to the use of sales compensations (Dubinsky and Thomas, 1984;
DeConinck, 1992; Robertson and Anderson, 1993; Ingram et al., 2007). The size of
sales compensation is usually discussed, but the time structure of sales compensation
has been less addressed in the previous studies (including insurance studies). In the
insurance market, both immediate compensation (insurance companies can pay
salespeople 70 or even 100 percent of the whole compensation immediately when the
deal is closed) and leveled compensation (salespeople could only receive a small part
of the whole compensation in each period) are used in reality. The idea relates to
human time preference, and has received a great deal of attention by economists
(Viscusi and Michael, 1989; Cropper et al., 1992; Frederick et al., 2002; Tanaka et al.,
2010). We think time preference theory could provide us with an opportunity to see
how the time based sales compensation may affect the product recommendations
made by the insurance brokers.
Third, how consequential evaluation, ethical evaluation and perceived peer
behavior (what insurance brokers believe their peers would do) will affect insura nce
brokers’ ethical attitudes toward selling insurance to high-risk customers has been less
studied. Yet, the three factors are thought to be influential in the ethical decision
studies (Trevino, 1986; Jones, 1991). Finally, to what extent the management stringency
of the insurer (e.g. underwriting and claim management) could affect the brokers’
attitudes toward selling insurance to high-risk customers is still unclear. In sum, few
financial regulation studies have examined the issues we proposed. This paper fills the
gap by empirically testing the impacts of:
.the size and timing of sales compensations;
.the management stringency of the insurer; and
.the insurance broker’s own moral views on product recommendations made
by the brokers.
Literature
Selling insurance to high-risk customers
In the insurance studies, it was argued that individuals with higher risks may prefer to
buy more insurance, as long as it is profitable and the behavior is unobservable by the
insurers (Cutler and Reber, 1998; Finkelstein and Poterba, 2004; Fang et al., 2008; Cohen
and Siegelman, 2010). To alleviate the negative impacts of adverse selection problems
on the insurers, some suggestions have been made. For example, Cutler and
Reber (1998) mentioned that risk-rated premium and underwriting could prevent
Influences
of sales
compensations
27

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT