Principal Agent Model
Throughout my life, most of my interactions at work have
fallen under the category of the standard principal-agent model. However, the position
I had over the summer fits the triangle model quite well. As I discussed in my
previous post, this past summer, I was a college financial representative for a
mutual insurance company. A mutual insurance company is one in which the
company is owned entirely by the policyholders. Therefore, as an associate, I
worked as an agent for both my clients and the firm. I was quite literally an independent
contractor working for the company, in which my tax form filed was 1098.
From the company’s side, they expected me to do an
exceptional job finding and scouting out new clients to meet sales
goals. It was a process known as “building a book of business” in the sales world.
Through these clients, they pushed me to do my best to sell the different products
the company had to offer. Certain products were able to catch the company a greater
margin and those happened to be ones they told us to bring up in a conversation.
For example, the company didn’t profit much off of long-term care insurance but made a lot off of whole-life term policies. However, the firm constantly
reminded us that we were only to sell products to them if it was in the best
the interest of the client. Insurance representatives have a bad reputation for
selling products that are not necessary, which is why the company held this
the value so highly.
On the other hand, I was also an agent to the client and had
licenses that forced me to act in the best interest of the client. Even if it
wasn’t specifically mentioned in my license agreement, I still am not keen on committing
immoral acts on people. So my role to them was to help identify their financial
goals and then create a dynamic plan of action on how they could achieve them.
Based on what their needs were, I would recommend certain products to act as a
solution. As you plugged more holes in your boat, later down the line additional
insurance products become benefits and not solutions.
This is where it can
be quite tricky, as it is incredible for the company from a profit standpoint
if the client sticks with the company for their life. However, a lifetime
partnership would allow both the company and agent to profit by the repeated
purchase of their products and possibly additional policies installed. So you
would have to say that based on that, both principals see eye to eye on what is
a good performance by the agent. Both the clients want to have someone who can serve and meet their needs, and the company wants an agent who can do
that. In the perfect world, there would be no reason to switch to a different insurance
provider if the agent you were first introduced to were able to do this. However,
as I have stated before I believe that some agents just don’t have their clients’
interests at heart and fall into the human nature of greed.
The agent can also fail to satisfy the company’s sales goal
while still satisfying the individual client's goals. An agent will get fired if
they do not have enough customers. Therefore, he could be doing a fine job with
the few customers he has but still gets the chopping block. This would cause
tension between the company and the client. However, generally, if a person has you as
their client, they are very unlikely to get fired. Even if they do end up
leaving the company, as the client you get passed to the highest up agent at that
office who will continue to help have your goals met.
Sales is a tough position to be in ethically, especially for insurance products, because in the near term getting the client to buy more is the profitable thing to do, but in the longer term, especially if the product doesn't fit the client's needs, there will be disappointment which it become more obvious to the client what the policy does cover and what it doesn't. An additional factor that matters here is that many clients lack basic financial literacy. So to make a decision in this space they need to trust somebody. This lack of financial literacy provides a recipe for some scamming to happen.
ReplyDeleteApart from your personal experience in this situation, I wonder if you have any general suggestion that might resolve the problem. You mention that the company you worked for was a mutual insurance company. I wish in this post you had explored that more. Would a for profit insurance company with shareholders have handled the issue differently? Would they be even more unscrupulous about selling policies that weren't in the client's interest to possess? Or does that matter at all?
I'm going to share a story about my own (term life insurance purchases) which maybe will help you in giving a reaction. As an employee of the U of I I was able to purchase life insurance through a company the state of Illinois contracted with. The terms were quite reasonable so I got quite a lot of optional coverage. Then, when I retired early, I was able to keep that coverage for five years, at the same reasonable rate. But when I turned 60, that went away and I had to find some alternative. I ended up purchasing less than half the coverage I had previously, and then dividing that between two providers, AAA and AARP. Now I'm near 65 and I'm about to cancel both coverages. These decisions I'm making, because they make sense in my circumstance. The cancellation is triggered by the premium increase that will happen when I turn 65, but also the realization that I don't need life insurance anymore. I wonder if an insurance company would ever give that sort of advice.
The client's lack of financial literacy is definitely the root cause that opens up the possibility of scamming. Due to their incompetence in the financial sector, it is quite easy for advisors to take advantage of their clients. Luckily, the company I worked for prided itself on being loyal and honest to their customers. However, there is always one bad apple and I am sure they do their best to hide these issues when they arise.
DeleteAs for a solution to the problem, I think it would be a good idea to create a website or software that could compare your coverage to other people who are in a similar situation. Almost like a website that compares car insurance quotes, rather more complex and takes all your financial advisors recommendations into account. It would then let you know which are necessary, allowing you to drop the rest of the policies.
Mutual or not, the company's business model wouldn't change the client interactions. There is still the possibility for them to scam as it allows the company to do better since they sell more. This would then return a higher profit to the stockholder.
I am sure you receive great coverage as a UIUC staff member. As you get older, the rates do tend to increase if it's a variable or term policy. While you may not need life insurance anymore since your kids are long on their way, long term health care could be a good investment depending on the price. As healthcare costs continue to rise, spending a day in the hospital is wicked expensive and only grows more with each passing year. I think that a financial advisor at my company would give that advice if it made sense with the rest of your finances. IE. You have the capital to finance any health endeavours