Final answer:
Insurance companies provide contingent commission agreements to encourage agents to bring in profitable business and manage adverse selection risks. Large client pools enable insurers to negotiate better rates, and government mandates for insurance purchases help standardize market prices while allowing insurers to still screen for high-risk individuals.
Step-by-step explanation:
Insurance companies offer contingent commission agreements to incentivize brokers or agents to provide volume, profitability, or growth to the insurance carriers. These agreements are often used to align the interests of the agent with those of the insurer, ensuring that the agent works to bring in business that will be profitable and maintainable for the insurance company.
With a large pool of clients, insurance companies have the leverage to negotiate with health care and service providers for lower rates, which is beneficial to both the insured individuals and the insurance company's bottom line when claims are paid. Moreover, due to risks associated with adverse selection, where individuals with a higher probability of claims might be more inclined to purchase insurance, companies try to manage their risk by incentivizing certain consumer behaviors or separating buyers into risk groups.
Additionally, government interventions often require individuals to purchase insurance, such as auto or homeowner's insurance. This ensures a broader base of insured individuals, mitigating the risk of adverse selection and allowing insurance companies to set prices based on market averages. Although required to provide insurance, companies cannot be forced to sell it at low costs to high-risk individuals, resulting in selective issuing of policies.