Contingent Commissions and Market Cycles Paper by: Lan Ju, UWI, Madison Mark J. Browne, UWI, Madison Discussed by: Puneet Prakash, VCU, Richmond

Main Idea Profit based contingent commission mitigates the effect on underwriting cycle Process: Monitoring role of producers Competitive bidding reveals mispricing errors to producer Profit based contingent commission provide an incentive to steer away business from insurers who under price

Test using 2SLS Loss Ratio Development (LRD) = F (Con Comm, Risk, Investment Experience, Premium growth, controls) H0: Sign on Con Comm is negative and significant Evidence in support of H0.

Strengths of the paper Idea itself Literature Review Grace and Hotchkiss (1995)

Some Technical issues Sample: Consists of only firms with positive growth in premiums earned . Why? Theoretical argument: In favor of simultaneity, yet no LRD as independent variable in 1st stage regression IV estimation: Some canned procedures correct for s.e.; some do not IV estimation: Need one exogenous variable correlated to 1st stage equation, but not correlated to main dep var LRD Theoretical argument: The amount of Contingent Commission depends upon Loss ratios.

Suggestions- Technical Heckman procedure instead of Tobit Hausman Test on endogeneity Geographic Herfindahl 3 year LRDs as in Harrington, Danzon, Epstein (2005) Speed of claims – OECD committee guidelines Increase sample size Increase sample size in order that the assertion made in the paper, viz., those that pay greater contingent commission in soft market have “less” adverse loss ratio development in the subsequent hard market.

References Grace, M.F. and Hotchkiss J.,1995, JRI Pagan, A., 1984, IER Pagan, A., 1986, RES