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Consumer Demand and the Marketing of Automobile Insurance

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Consumer Demand and the Marketing of Automobile Insurance

Automobile insurance is a product that consumers demand but usually hate to purchase. Collecting on an insurance policy usually means that something went wrong. Policies covering automobiles cover claims due to injury, damage and death. In addition, people envision battles with insurance agents or claims adjustors when it is assumed that a payment from a policy is due. Regardless, the demand for automobile insurance is high due to a variety of reasons. These determinants of demand usually, but not always, coincide with the marketing schemes of the insurance companies.

The main factor driving demand for automobile insurance is state regulation that requires certain types and levels of insurance. All states require some degree of liability insurance that covers individuals hurt and property damaged due to the fault of the insured. Many states have additional, mandatory requirements for the drivers of automobiles. Since no states allow drivers to legally operate an automobile without some degree of coverage, it is hard to estimate how many individuals would elect to drive without insurance if given the opportunity.

The main parts to automobile insurance include liability, bodily injury, comprehensive and collision coverage. Additional coverage not usually required by state authorities include non-owned auto, rental car reimbursement, additional medical and GAP coverage. GAP coverage provides for the total payoff on a car loan after an accident regardless of the market value of the car.

One determinant that was found to influence demand was the number of wage earners in a household (Khovidhunkit). In the same study it was found that the level of income was also a factor in the demand for automobile insurance. Both the number of wage earners and the level of income are both positively related to the amount of insurance purchased. It was also found that the increase in demand for insurance as a result of an increase in income was greater in single wage earner households than in households with more than one wage earner. One would guess that households with multiple wage earners felt more secure in their financial situation and avoided purchasing costly insurance when possible. The study went further and found that the increase in the demand for automobile insurance increased by smaller amounts as income increased as family size increased and as the average age of the family members increased.

We could expect that a family with more than one wage earner could afford to purchase additional automobile coverage from an increase in income. This seems to be related to the observation that as the family size gets larger, less of an increase in income is spent on additional insurance. The finding about older households spending less of an increase in income on insurance is less clear. As people get older their incomes increase until the age of retirement. However, prior to retirement people start to save a greater portion of their incomes for their retirement needs. It was not indicated if the age of the households was broken down into groups.

In a study by Sherden, it was found that automobile insurance was a necessity and was in general not sensitive to income. This paper went further and looked at the demand for bodily injury, comprehensive and collision types of coverage. Collision coverage was shown to be the most sensitive to changes in income. Bodily injury was less sensitive to income changes than collision coverage but was more sensitive than comprehensive coverage. This would make bodily injury the luxury good of the three types of coverage. It would then make sense that comprehensive insurance is purchased in smaller quantities and often only when required. Collision insurance is expensive but more readily purchased with increases in income. In general the fact that auto insurance is not sensitive to income changes is attributed to the rise of multi-earner families.

Sherden also found that automobile insurance was large enough in a household budget to cause price increases in car insurance to cause decreases in demand for the insurance. The decreases increase at an increasing rate with the increases in the premiums on a policy.

Another factor that determines consumer demand for automobile insurance is what is called urbanization. This is a term that refers to the population density in a geographic area. Another term used to describe urbanization is "locational risk". Sherden references a number of studies that show insurance claims for automobile damage and injury increase with an increase in population and road density in an area. This is attributed to an increase in interaction among people in an urban setting. There is a substantial increase in demand for insurance from low to medium density areas and a slower increase in demand for coverage from a medium to high density area. Apparently drivers know the increased risk of driving in an urban environment and want increased insurance protection accordingly. It is also widely known that car theft and vandalism rates are higher in urban areas than in rural areas.

Consumer demand for automobile insurance and how that insurance is marketed by the insurance companies has much to do with the insurance regulations in a particular state. The results of studies seem to show both positive and negative effects from the level of government regulation in the market (Jaffee and Russell). A positive relationship was found between the automobile insurance premium and the number of uninsured drivers. Requiring drivers to maintain insurance and more stringent enforcement of the laws requiring insurance coverage then can reduce premiums and better protect drivers and others.

However, it was also found states that increase regulations on automobile insurance companies and the drivers of the automobiles causes a reduction in insurance competition in the state. This has the effect of increasing insurance premiums and reducing demand for coverage. Jaffee and Russell were able to show that the volume of insurance contracts at the Big Four automobile insurance companies decreased with significant increases in regulations. The Big Four insurance companies are State Farm, Allstate, Farmers and Nationwide.

No fault insurance provides for medical coverage in case of injury due to a motor vehicle accident. The coverage is given to the policy holder regardless of who is at fault in an accident. It was found that no fault insurance raised insurance premiums by increasing the size of the claims in the insurance companies after an accident (Khovidhunkit). A number of states that required no fault insurance have eliminated that requirement. Florida still requires no



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