Blog 27: The Cobra Effect by Xavier Lo, FIA, FRM, MBA

Recently I spoke to a friend who told me her sales department [銷售部門] employees do not get paid any commission [佣金]. This is very uncommon and the apparent reason was that the company does not want to stress the employees too much that they would quit. On this note, let me introduce you to the Cobra Effect [眼鏡蛇效應].

The Cobra Effect story came from India, where the government wanted to lower the number of cobras as they were dangerous. They paid some money if they could give a dead cobra to the government. This actually reduced the number of cobras for a while. However, what happened shortly was that people started breeding [配種] cobras just to kill for money. It was a very good business! Once the government realised this, they immediately stopped the reward [報酬], and the businesspeople released the cobras into the wild (as they were not worth any money anymore). The end result was that there were more cobras in the end.

What is the moral of the story [故事嘅教訓]? You need to think really carefully about incentives [鼓勵性措施]. This happens in insurance companies as well. For example, you might want to incentivise agents to sell a new product by giving higher commission rates for that product. What would actually end up happening is that your agents will ask current customers to cut their existing products and replace it with the new product [新換舊] – which means you effectively generated no new sales, but the agents have gained lots of commission.

If we think back to the beginning of the blog, how did the sales department do? I think as expected, they didn’t make a lot of sales at all. Today’s lesson is a big reminder to all of you: incentivise properly!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

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