Bundling Insurance – Who Really Benefits?
Bundling is most commonly referenced for consumers seeking to purchase Homeowners Insurance and Automobile Insurance from the same insurance carrier; these are the two products which together generate the greatest offered discount percentage when purchased simultaneously.
In many cases, the discount ranges from 10% to 20%; however, SLOW DOWN and read the fine print or start to ask questions: Does the discount apply to both policies or is the offer only for one line of business? Does the percentage vary from one line to the other? What is the total premium independently for each product and then again as a whole?
NOT SO FAST! Who benefits? From the consumer’s point of view, the initial understanding may be the premise that he/she has already found the cheapest insurance premium and is further gaining an additional percentage discount on both products; with this in mind, research has found that it is very rare to find a carrier who has the lowest homeowners insurance premium and at the same time offers the lowest auto insurance premium in the same territory. So after all, DO WE SEEK THE LOWEST PREMIUM or ARE WE AFTER THE BUNDLING DISCOUNT?
THE REAL BENEFIT: Insurance Companies’ primary concern is long term underwriting gain; if clients were to come on board only for one year and then disappear, the acquisition cost alone would diminish any profit after the costs of administration of the policy. Carriers create bundling discounts and persistency credits which come in different forms as published by different companies; these are simply avenues of customer retention and increased loyalty. When clients have more than one policy with the same insurance company, statistics show that retention is substantially higher thereby increasing the long term profit potential to the insurance company.
CUSTOMER BEHAVIOUR: The industry is now at a juncture observing changes of behaviour between the Baby Boomers and the Generation Y customers. Baby Boomers have been more likely to conserve their current insurance relationship, whereas, Generation Y customers are more likely to use social media and technology to keep shopping premium rates much more frequently and break the bundles for the lowest premium for each policy.
Contrary to popular belief, insurance carriers conduct annual audits both for reporting purposes but more importantly for actuarial purposes; the results of these audits allow actuarial firms to assess the premium collected, claims paid and operational expenses not only in general but broken down by territory (Zip Code, City, County, State) – new rates are calculated, presented to the State Authorities for approval and published each and every year. The industry refers to the ultimate result as an ever changing underwriting appetite.
The furthest thing from the truth is a comment such as: ‘XYZ Company is always the cheapest!’, ‘ABC Company is the most expensive!’, ‘JKL Company offers a cheap entry premium and raises it the next year!’. If any one of these comments were true, they would be very short lived…
CAT & MOUSE: Every industry has its frustration factor; in this case, the carriers are constantly auditing in order to collect the correct premium for the risk; at the same time, the consumer is constantly shopping for the carrier with the cheapest premium thereby trying to beat the underwriting cycle.
The simple truth is that insurance is purchased to offer financial security to the client after a claim is presented; claims are paid out of collected premium and every single client hopes that his/her insurance carrier has plenty of money to pay their claim. In an effort to maintain financial strength and withhold necessary reserves to pay claims, carriers are well regulated and well audited.
This article was written to offer the consumer a full circle view to the insurance cycle and a simple understanding of how the idea of insurance bundling may or may not apply.