How Does Price Presentation Influence Consumer Choice? The Case of Life Insurance Products

• Date: 01 June 2015
• DOI: http://doi.org/10.1111/jori.12026
• Author: Carin Huber,Hato Schmeiser,Nadine Gatzert
• Published date: 01 June 2015

HOW DOES PRICE PRESENTATION INFLUENCE CONSUMER

CHOICE?THE CASE OF LIFE INSURANCE PRODUCTS

Carin Huber

Nadine Gatzert

Hato Schmeiser

ABSTRACT

Life insurance is an important product for many individuals, both to protect

dependents against the premature death of an income producer and to

provide savings in later retirement years. These kinds of products, however,

can be quite complex. Regulatory authorities and consumers currently ask

for more cost transparency with respect to product components (e.g., risk

premium for death benefits, savings premium, cost of investment guarantee)

and administration costs. The aim of this article is to measure the effects of

different forms of presenting the price of life insurance contract components

and especially of embedded investment guarantees on consumer evaluation

of those products. The intention is to understand the extent to which price

presentation affects consumer demand. This is done by means of an

experimental study and by focusing on unit-linked life insurance products.

Our findings reveal that contrary to other consumer products, there are no

precise effects of “price bundling” and “price optic” on consumer evaluation

and purchase intention in the case of life insurance. Consumer experience

and price perception, however, yield a significant moderating effect.

INTRODUCTION

Due to a declining confidence in state-run pension schemes as well as a considerable

demographic change in most Western countries, life insurance products offered by

private insurance companies have become increasingly important for old-age

Hato Schmeiser is Chair for Risk Management and Insurance Economics at the Institute of

Insurance Economics, University of St. Gallen, Kirchlistrasse 2, 9010 St. Gallen, Switzerland. He

can be contacted via e-mail: hato.schmeiser@unisg.ch. Nadine Gatzert is Chair for Insurance

Economics and Risk Management, Friedrich-Alexander-University of Erlangen-Nu

¨rnberg,

Lange Gasse 20, 90403 Nuremberg, Germany. Gatzert can be contacted via e-mail: nadine.

gatzert@fau.de. Carin Huber is at Zurich Insurance Group, Mythenquai 2, 8022 Zurich,

Switzerland. Huber can be contacted via e-mail: carin.huber@zurich.com. The views presented

in this paper express the authors’ personal opinion and do not necessarily reflect the view of

Zurich. The authors would like to thank the anonymous referees for valuable comments and

suggestions on an earlier version of the paper.

© 2014 The Journal of Risk and Insurance. 82, No. 2, 401–431 (2015).

DOI: 10.1111/j.1539-6975.2013.12026.x

401

provisions. Furthermore, most life insurance contracts that in addition to a death

benefit contain a savingscomponent offer a minimum return on the savings part of the

product. In particular, investment guarantees in unit-linked life insurance policies

typically assure that a minimum amount is remunerated to the consumer, even if the

value of the mutual fund falls below a predefined guarantee level. Such investment

guarantees can be of substantial value depending on the riskiness of the underlying

fund and the duration of the contract. Their provision,along with the other elements of

the policy, also can be quite complex, leading to current regulatory efforts in most

countries of the European Union to require that insurance companies provide a

detailed price presentation,including administration costs and other elements to their

consumers. The stated objective of these regulations is to assist in consumer product

evaluations; therefore, consumer understanding of and reaction to price presentation

is quite important. The aim of this article is to analyze the effect of receivinga detailed

price presentation on consumer willingness to purchase life insurance.

Specifically, we examine whether different forms of price presentations—that is,

prices being presented more or less abstract using a single up-front payment for the

guarantee, monthly payments, or the guarantee price defined as an annual percentage

of the value of the mutual fund, in the following referred to as “price optic”—will

influence consumers’ choice to purchase an investment guarantee. Furthermore, we

allow for different levels of price bundling. In this context, identical products are

offered to the participants of our experimental study, showing the total price of the

product versus viewing the prices of all individual product components (i.e., term life

insurance costs, investment guarantee costs, and administration costs). This way, we

are able to investigate the extent to which different price presentations, that is, price

optic and price bundling, exert an influence on consumers’ decisions and on their

evaluation of the product.

The experimental analysis has been conducted using an online survey for a Swiss

panel (German and French speaking part of Switzerland) that is representative with

regard to region and gender. The survey was divided into three parts. In the first part,

a product card was shown to the participants for evaluation. Using a 3 4 factorial

between-subject design, every participant received only one (of the 12) product offers

for evaluation, such that each card was answered by around 55 respondents. Based on

this representative sample, we tested four hypotheses. First, we examined whether

consumer evaluations of an investment product are affected by whether or not the

price information is bundled or abstract (in the sense of “price optic,” i.e., displaying

the guarantee in terms of an annual percentage of the fund value). Second, we test

whether the purchase intention of the consumers is affected by the price information

being bundled or abstract. Third, we study the moderating effect of consumers’

experience with insurance or investment products on the relationship between price

presentation and consumer evaluation. Fourth, we investigate the predictive power

of consumer experience and price perception on their purchase intention.

To test these hypotheses regarding consumer evaluation, in a first analysis, we apply

multivariate analyses of variance (MANOVA) models, based on consumer

satisfaction and likelihood of recommending. In the second analysis, we enhance

this relationship by a moderated model, using consumer experience with insurance

402 THE JOURNAL OF RISK AND INSURANCE