Working Paper | HBS Working Paper Series | 2013

Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market

by Santosh Anagol, Shawn Cole and Shayak Sarkar

Abstract

We conduct a series of field experiments to evaluate two competing views of the role of financial service intermediaries in providing product recommendations to potentially uninformed consumers. One view argues intermediaries provide valuable product education, and guide consumers towards suitable products. Consumers understand how commissions affect agents' incentives, and make optimal product choices. The second view argues that intermediaries recommend and sell products that maximize the agents' well-being, with little or no regard for the customer. Audit studies in the Indian life insurance market find evidence supporting the second view: in 60-80% of visits, agents recommend unsuitable (strictly dominated) products that provide high commissions to the agents. Customers who specifically express interest in a suitable product are more likely to receive an appropriate recommendation, though most still receive bad advice. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong.

We then test how regulation and market structure affect advice. A natural experiment that required agents to describe commissions for a specific product caused agents to shift recommendations to an alternative product, which had even higher commissions but no disclosure requirement. We do find some scope for market discipline to generate debiasing: when auditors express inconsistent beliefs about the product suitable from them, and mention they have received advice from another seller of insurance, they are more likely to receive suitable advice. Agents provide better advice to more sophisticated consumers.

Finally, we describe a model in which dominated products survive in equilibrium, even with competition.

Keywords: Customers; Insurance; Product; Service Operations; Agency Theory; Sales; Motivation and Incentives; Competition; Value; Insurance Industry; India;

Citation:

Anagol, Santosh, Shawn Cole, and Shayak Sarkar. "Understanding the Advice of Commissions-Motivated Agents: Evidence from the Indian Life Insurance Market." Harvard Business School Working Paper, No. 12-055, January 2012. (Revised March 2013.)