commission

[padmaja]

In Page 5 unit 9, while discussing alternate commission structure, there is the below statement: "Where there is commission paid as a large initial amount (such as indemnity commission), there is often a lesser amount payable as renewal commission for the balance of the policy term, to encourage the distributor to promote persistency."

I didn't understand the last statement of promoting persistency. Giving higher initial commission will not help in persistency. how is lower renewal comm going to help. Are they saying, while you have preponed most of the future commission (as indemnity comm), you shd still have some renewal commission for the distributor to have incentive to collect the renewal premiums?

I am confused.

 

[Charlie]

Yes, I think you've answered your own question!

The alternative to having LOW renewal commission is to have NO renewal commission, in which case the broker has no incentive to encourage good persistency from its clients. So it might as well sell policies to clients, collect its initial commission and then encourage its clients to lapse their policies and sell them new policies (collecting more inital commission).

If there is at least SOME renewal commission, then there is less incentive for the brokers to do this...

 

[bystander]

paying indemnified commission can mean there is clawback provisons if a policy does not continue for n years.