Transcript Contingent Commissions and Market Cycles Discussed by: Puneet Prakash, VCU, Richmond

Contingent Commissions and
Market Cycles
Paper by:
Lan Ju, UWI, Madison
Mark J. Browne, UWI, Madison
Discussed by:
Puneet Prakash, VCU, Richmond
Main Idea
• Profit based contingent commission
mitigates the effect on underwriting cycle
– Process:
• Monitoring role of producers
• Competitive bidding reveals mispricing errors to
producer
• Profit based contingent commission provide an
incentive to steer away business from insurers who
under price
Test using 2SLS
• Loss Ratio Development (LRD)
= F (Con Comm, Risk, Investment Experience,
Premium growth, controls)
• H0: Sign on Con Comm is negative and
significant
– Evidence in support of H0.
Strengths of the paper
• Idea itself
• Literature Review
• Grace and Hotchkiss (1995)
Some Technical issues
• Sample: Consists of only firms with positive
growth in premiums earned . Why?
• Theoretical argument: In favor of simultaneity,
yet no LRD as independent variable in 1st stage
regression
• IV estimation: Some canned procedures correct
for s.e.; some do not
• IV estimation: Need one exogenous variable
correlated to 1st stage equation, but not
correlated to main dep var LRD
Suggestions- Technical
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Heckman procedure instead of Tobit
Hausman Test on endogeneity
Geographic Herfindahl
3 year LRDs as in Harrington, Danzon,
Epstein (2005)
• Speed of claims – OECD committee
guidelines
• Increase sample size
References
• Grace, M.F. and Hotchkiss J.,1995, JRI
• Pagan, A., 1984, IER
• Pagan, A., 1986, RES