The Impact of Relative Commissions on Sale of Various Types of Life Insurance: An Application of Game Theory

Abstract

Iran's below-average life insurance penetration rate relative to the global average, is caused by several factors. Sellers' behavior and motivations can be one of these factors. Given that the distorted prices divert the resources, the imbalanced sales commission rate could generate a conflict of interest among the players in life insurance market. Universal life insurance has a substantially higher commission rate than other types. Therefore, it can incentivize sellers to offer more universal life insurance than term life insurance, regardless of customers' needs. In this paper, we postulate that the existing sales commission system in the Iranian life insurance industry may deviate customer demand and raise the likelihood of policy surrendering. This issue is a principal-agent problem for insurer and seller, and supplier-induced demand (SID) for seller and customer. In the form of signaling games, these conflicts of interests among the players has been analyzed using descriptive-analytical method based on game theory. We observed that if the seller has the same desire to sell different types of life insurance, there is a greater likelihood that they will provide genuine advice to the customer. By reducing the surrender rate, the situation can be improved.