Life insurance prices and transparency

There is an interesting piece in Freakonomics, Levitt & Dubner, 2005 (there is a freakonomics blog) regarding the pricing of term life products in the US. It talks about the information advantage that experts enjoyed over consumers prior to the advent of the internet. Essentially, term life products are simply commodities and, as such, are perfect for online comparison.  Because of this ability to search online and compare, the prices fell dramatically.  Now prices still look lower, but are they?

More complex products such as whole life insurance did not decrease in price to the same extent as term life. This would suggest that comparison shopping only really works when you feel confident enough to compare product features other than the price – in other words more complex products still require skill and knowledge to compare.

Insurance companies reacted to this change as points of difference other than price obviously needed to be found in order to preserve some competitive advantage. Life insurance is not a pure commodity like oil or gas – in fact, I’m not sure I can think of a single consumer product that is sold purely on a commodity basis… People are still influenced by brand, perceived product benefits (Hiscox advertise insurance on the premise that they provide more complete cover) and also by added incentives such as affinity marketing deals with other companies who provide a free or reduced cost service for the insurance company’s customers.

If you were an insurance company, what else could you do to reduce the commoditisation of your product? Perhaps you might make it more difficult to compare? Or you might even advertise a low price but charge a whole load of extras once the customer starts getting deeper into the process. Insurance companies are not alone in this practice – budget airlines now advertise low fares that get them to the top of the price comparison engines but add a plethora of charges afterwards for such ‘luxuries’ as priority boarding, paying by credit card, checking in at the airport and checking in luggage. The net effect is that customers feel cheated. And rightly so. But what ‘extras’ can insurance companies charge you for?

Just like the airlines, insurers advertise low prices. However, after the application process, which can be lengthy enough to discourage more searching and comparison, many people are offered premiums higher than those advertised. People face higher premiums because insurers have tightened the criteria they use to calculate the cost of cover. An article I saw in the Sunday Telegraph a few years back (2005 but I can’t remember the exact date) revealed that insurers charge higher premiums to applicants previously considered normal weight. Is this because they genuinely feel these people are now at an increased risk of ill health due to obesity or is it just a way of restricting the number of applicants that get the cheapest rate?

Perhaps the higher prices are justified and the only thing they do wrong is list cheaper prices in the comparison engines.  But then if your competitors are all doing that then how do you attract customers when you’re at the bottom of the list on comparison sites?  I’m not sure what the solution is – more sophisticated comparison engines?  The trouble is that access to more information does not make you an expert and more sophisticated searching may require the skills of an insurance broker to use it.

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