Pre-paid Legal Services’ Business
Prepaid creates value by providing legal expense insurance allowing customers to reduce their legal liability in civil or criminal actions. Their bestselling Family Plan that provides reimbursement for legal expenses incurred by customers and their spouses and discounted rates for legal services over those provided in contract. Furthermore, they allow their own customers to earn their own income by MLM programme where they receive commission for selling Prepaid’s insurance to others.
The critical risks that they have to control are problems are defaults on premiums, loss of their MLM salesmen who are their main revenue drivers, failure to collect advanced commissions and low membership persistency. Default of premiums can occur when membership persistency is low. This would result in overpayment of commissions to salesmen who are given 3 years advanced commission payment. This is a cost to the company as they can only retrieve back 50% of overpaid commissions. Furthermore, there are also cases of default in the commissions overpaid which further adds to the cost to the company.
Change of Commission Formula
Pre 1995 commission policy resulted in large outflow of money in the beginning year (70%) and smaller outflows in subsequent years (16%). This results in higher cost to company for a fresh signup. This could lead to agency cost where the salesmen are more interested in new signups rather than ensuring that the new customer continues to stay with Prepaid.
After 1995, the policy changed to provide a flat rate of 25% of commission on premiums for initial and subsequent years with advance payment of 3 years. There would be a 50% deduction of unearned advances for next signup. This incentivizes salesman to not only get new customers but also to ensure that they continue with Prepaid, allowing Prepaid to continue enjoying high persistence in membership.
Fortune’s criticism of PPLS’s method for reporting for...
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