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

Abstract

We conduct a series of field experiments to evaluate the quality of advice provided by life insurance agents in India. Agents overwhelmingly recommend unsuitable, strictly dominated products, which provide high commissions to the agent. Agents cater to the beliefs of uninformed consumers, even when those beliefs are wrong. We also find that agents appear to focus on maximizing the amount of premiums (and therefore commissions) that customers pay, as opposed to focusing on how much insurance coverage customers need. A natural experiment requiring disclosure of commissions for a specific product results in agents recommending alternative products with high commissions but no disclosure requirement. A follow-up agent survey sheds light on the extent to which poor advice reflects both the commission incentives as well as agents' limited product knowledge.

Conflicts of Interest and Steering in Residential Brokerage

“…Our results on steering behavior also resonate with other work documenting that consumers often receive advice from experts that is not in their interest. For example, Mullainathan, Noeth, and Schoar (2012) ;Christoffersen, Evans, and Musto (2013); and Del Guercio and Reuter (2014) study financial advisers and broker recommendations for mutual funds; Jiang, Stanford, and Xie (2012) analyze bond ratings; Schneider (2012) ;Anagol, Cole, and Sarkar (2017);and Shapiro (2015) examine the auto repair, insurance, and health industries, respectively.…”

Financial Fraud: A Literature Review

“…Another segment of the financial services industry that has been repeatedly plagued by episodes of large‐scale mis‐selling is the life‐insurance and private pensions industry. Widespread mis‐selling of life insurance and pension plans resulted in major scandals and regulatory actions in the United States in the 1980s (Fischel and Stillman, ; Egler and Malak, ), in the United Kingdom in the 1990s (Black and Nobles, ; Ryley and Virgo, ; Schulz, ; Ward, ) and in the Netherlands and India in the 2000s (Anagol et al ., ; Halan et al ., ).…”

Client Involvement in Expert Advice: Antibiotics in Finance?

“…Results show that, although advisor recommendations primarily aim to maximize advisors' own financial interests, they also take into account a client's existing portfolio composition. Anagol et al (2017) run a field experiment with commission-compensated agents in the Indian life insurance market. Sales agents are shown to respond to customers' self-reported and mistaken beliefs about what product best suits their needs, even in cases where the more suitable product would earn the sales agent a higher commission.…”

“…Sales agents are shown to respond to customers' self-reported and mistaken beliefs about what product best suits their needs, even in cases where the more suitable product would earn the sales agent a higher commission. Our setting differs from that of Mullainathan et al (2012) and Anagol et al (2017) in that we focus on non-artificial heterogeneity in advisory clienteles and actual instances of client involvement in the process of financial advice.…”