Factors Influencing Insurance Decisions - Essay Example

? Factors Influencing Insurance Decisions and Introduction The decisions to purchase insurance covers are influenced by factors such as the market structure, price of the cover, and underwriting policies. A person planning to purchase an insurance cover must consider these factors before making the final decision whether to purchase the policy. This means that a person may fail to purchase an insurance policy if one or more of these factors are unfavourable. This also means that the insurance market is similar to the goods market, whose demand depends on certain factors. Consumers may fail to cover their lives, vehicles, and health even if doing so is beneficial. An understanding of the factors that affect consumer demand for insurance is essential for both the sellers and buyers of policies. The understanding helps these buyers to make the right decisions at the right time (Williams, Smith, & Young, 1998). Structure of Insurance Markets The market structure of an insurance industry includes the number of sellers and whether they are efficient. This is because the efficiency of a market is directly proportional to its structure (Greene, & Serbian, 1983). There are various market structures that influence the demand for insurance; they include perfect competitive, oligopoly, and monopoly. The perfect competitive market is one that has numerous sellers and buyers, and the insurance companies are free to penetrate and exit the market. This market is characterized by perfect information and standardization of products and prices. This means that insurance buyers have the full knowledge of the market activities such as the types of policies, their prices, and the underwriting guidelines. Buyers in this market have the freedom to purchase the policy they want from any seller because prices are standard. Insurance purchasers also have the freedom to leave one insurer and purchase a policy in another seller’s company when they find out that there are price differentials. The standardization and freedom in this market motivates buyers to purchase insurance policies (Dickson, 1989). A monopoly market, on the other hand, is the one that has a single seller. The seller dictates the policy to provide for the market and the price at which to sell the insurance. Monopolies are inefficient because of their ability to determine the product and the price at which to provide the good. This means that such as insurance market offers few choices to buyers in terms of the available policies. Buyers have no freedom to leave the market because they may not find the insurance policy elsewhere. Therefore, insurance buyers in a monopoly market have no freedom in the market; they may only follow the rules of the seller (Woodhouse, 1993). The lack of freedom may discourage buyers from alleviating risks using insurance. An oligopoly market is the one that has few sellers and the products are differentiated from one insurer to the other. Buyers in this market have the freedom to purchase the policy that suits their needs the best. However, since the sellers in the market are few, buyers do not have a wide range of choices. The few choices in this market may motivate some buyers to purchase insurance policies while other may not find the policies that suit their needs (Harrington, & Niehause, 2004). Price of Cover The price of an insurance cover also determines whether a buyer purchases the policy. This is because the incomes of buyers differ from one buyer to the other. A high price of an insurance policy discourages buyers from purchasing a policy. This is according to the law of demand, which argues that rational consumers prefer goods and services at low prices (Woodhouse, 1993). However, buyers may choose to purchase insurance policies at high prices when benefits are guaranteed. An example of a policy that buyers may purchase at high prices is life insurance. The life insurance policy is the one that covers the whole life of a person, and it is renewable after the death of that individual; the benefits of the policy are given to the beneficiary after the death of the buyer (Williams, Smith, & Young, 1998). The monopoly market structure may force buyers to purchase insurance policies at high prices. This case may occur, for example, in the health industry where consumers are forced to purchase health insurance. In this case, consumers have limited or no choices and they have to purchase health covers to ensure that they follow legal regulations of a country (Harrington, & Niehaus, 2004). Availability of Intermediaries Insurance intermediaries are the parties that help in bringing together buyers and sellers of policies. The intermediaries include agents and brokers. The agents are responsible for informing consumers about existing policies meaning that their function is to create awareness in the market. This means that these intermediaries do not make contracts on behalf of the insurance companies that they represent. Brokers, on the other hand, advice buyers about the policies to purchase, and they may make contracts on behalf of their clients. This means that brokers also create awareness of insurance policies in the market, but their functions exceed those of agents (Dickson, 1989). The major function of intermediaries is the creation of awareness of insurance in the market. These players inform buyers about existing insurance policies, their prices, and the terms and conditions of different companies. Buyers would not be aware of this information if the intermediaries were not in the market. The brokers who mediate in the market to connect buyers and sellers make insurance purchasing easier to buyers. This is because they explain to buyers the process of calculating insurance premiums using simpler language than that which is used in the companies (Woodhouse, 1993). The roles of intermediaries indicate that they play a vital role in the market. The intermediaries convince buyers to purchase policies while they are informing them about the policies in the market. This means that the absence of agents and brokers leads to lack of awareness of insurance in the market, and this would consequently lead to low demand for insurance. Therefore, the presence of insurance intermediaries such as agents and brokers increases the demand for insurance. Markets that do not have intermediaries sell few policies even if buyers have freedom and variety of choices (Williams, Smith, & Young, 1998). Insurers’ Underwriting Policies Underwriting in insurance is the process of determining the regular premiums that clients pay once they purchase a policy. The process is carried out by underwriters who have the knowledge of calculating risk given the information of a person or product. The underwriters calculate the premium amounts given the information of a person or product; for example, when calculating the health insurance policy of a client, underwriters require information such as the profession, age, financial status, and health history of a client (Greene, & Serbian, 1983). Underwriting also involves determining the occurrence that may lead to the reinstatement of a person. For example, in case of fire insurance, the underwriters determine the cause of fire that may lead to the restoration of a company to the state it was before the disaster. This is according to the proximate cause insurance principle, which states that an insurer restores a person or company to the states that they were in if the cause of the disaster is similar to the one that is stated in the policy. This indicates that the purpose of underwriting is to determine the terms and conditions of undertaking an insurance policy. Insurance buyers purchase more policies whose terms are not stringent (Dickson, 1989). Insurers’ Security and Solvency The insurers’ security also influences buyers’ decisions to purchase policies in a company. A secure and solvent insurance company is the one that has a capability of surviving in the market for extensive periods. Such an insurance company is also capable of reinstating numerous policy buyers to their previous positions in case of several disasters. Consumers have an interest in a company that is secure and solvent because it guarantees refunds when disasters occur (Williams, Smith, & Young, 1998). Consumers determine the security and solvency of an insurance company by finding out the period that the firm has been in the industry. Consumers trust companies that have survived in the market for more than five years. Consumers also check the history of a company of insuring people when disaster strikes. This is because a company that does not insure people when a disaster takes place may be insolvent. A company is also solvent when it has insured itself with a re-insurer. The re-insurer helps a company to raise funds to cover customers when risks turn into disasters (Woodhouse, 1993). This indicates that demand for insurance policies is high in companies that are secure and solvent. Conclusion The demand for insurance is influenced by factors such as price of cover, presence of intermediaries, underwriting policies, structure of the market, and security and solvency of the insurance company. The demand for policies is high when the price of an insurance cover is low, when intermediaries in the market are numerous, when the market is perfectly competitive, and when a company is solvent and has friendly terms and conditions. The demand for policies is low in a monopoly market, when prices are high, when the conditions of a company are stringent, and when a company is insolvent. This indicates that the sellers of insurance policies need to consider the demand factors when determining the decisions to sell policies. The consideration of the demand factors may increase the number of insurance policies they sell; this consequently increases sales and profits. References Dickson, G. C. A., 1989. Corporate risk management. London: Witherby & Co. in association with the Institute of Risk Management. Greene, M. R., & Serbein, O. N., 1983. Risk management: Text and cases. Reston: Reston Publishing Company. Harrington, S. E., & Niehaus, G. R., 2004. Risk management and insurance. Boston: Irwin McGraw-Hill. Williams, C. A., Smith, M. L., & Young, P. C., 1998. Risk management and insurance. Boston: Irwin McGraw-Hill. Woodhouse, J., 1993. Managing industrial risk: Getting value for money in your business. London: Chapman & Hall. Read More