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Optimizing Compensation Incentives: An Insurance Case Study

The Company

A leading North American property and casualty insurance company.

The Challenge

The client believed that its agent commission structure might be sub-optimal. Historically, the structure had offered one level of commissions for new policies and another for renewals. Top management wondered whether altering the structure would lead to higher profits.

The Solution

Many compensation changes were suggested but, ultimately, it was determined that slightly increasing commissions across the board or changing the differential structure between new and renewal policies would lead to improved agent performance. Though top management already favored a particular way to redesign agent commission, they worked with APT to test the performance of all their options. APT’s Test & Learn predictive analytics software compared agent performance under each potential commission structure to the current structure, taking into account dozens of variables, such as market share, market competitiveness, and length of relationship. This method allowed the insurer to determine the true incremental benefit of each compensation option.

The Results

The tests accurately showed that one of the compensation options that was not initially favored by management was, in fact, the most profitable program. The insurer’s choice of this new commission structure generated nearly $50MM per year in pretax profits.
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