Optimizing insurance pricing by incorporating consumers’ perceptions of risk classification

Abstract

Insurers primarily set premiums using cost-oriented pricing methods based on claims history. Customer-oriented pricing has yet to be widely applied. This article empirically tests consumers’ acceptance of (currently unused) risk characteristics in motor and term life insurance pricing in the United Kingdom, France, and Germany. We derive implications concerning how insurers’ can use the knowledge of consumer acceptance or rejection of specific price-determining factors when standardizing their pricing schemes. The results indicate that consumers highly approve commonly used risk-rating factors when their price-determining function is transparent. Furthermore, consumers are willing to provide insurance companies further personal information when such information is used for pricing. The provision of personal information allows insurance companies to conduct a critical review of attributes requested and used that have a low impact on premium amounts and lower consumer acceptance1.