Question

Describe an agency problem within the insurance firm and discuss what you think is causing the problem and how the problem might be better controlled.

Answer 1

The agency problem refers to the conflicts between the interest of the principal and the agent in any business deal. This problem arises when an agent, who has the responsibility to do best for the principal’s interest, start focusing on his personal interest rather than the principal’s interest.
In the insurance sector, insurance firms may also face this information as an agent, who is interacting with customers and explain the different policies to them according to their requirements, reduces his efficiency to make best for the firm, and start working for his personal interest such as start making a commission from customer to work from their side, and from company’s side.
This problem may arise when an agent does not feel satisfied with the compensation for his work as an agent start working for his commission from the customer when the firm does not provide him incentives and effective compensation package for his contribution.
The problem might be controlled by allowing a transparent management structure and by improving the compensation structure so that an agent will encourage working more for the company’s interest to get his interest will be fulfilled together. An insurance firm can provide incentives for extra work, provide a good and positive working environment to get the loyalty of its employees/agents.