What factors influence insurance prices

The selling price of the insurance products can be fixed for the duration of the distribution agreement. However, it is more likely that it will fluctuate in line with circumstances. Some of the factors that will determine prices (and changes in prices) are looked at below.

Competition

Both the insurer and the intermediary will want products to be priced for the marketplace – in other words, so that they will sell. There are many methods that intermediaries and insurers use to ensure that prices are competitive. They include review meetings and benchmarking.

Review meetings

The insurer and the intermediary may agree to meet regularly and review sales performance. If things are not going well, the insurer may decide to reduce the premiums and/or the intermediary may decide to reduce its commission.

A review meeting may be called when a conversion target is not met. If fewer customer enquiries are being converted into sales than expected or desired, this could be because the price is too high; the parties will need to meet to discuss what action to take.

Benchmarking

The parties may agree that the premiums payable for the insurance products will be compared with those payable for competing products, either regularly or on request by either party.

The scope of the benchmarking exercise will need to be quite carefully defined to ensure like-for-like comparisons. In deciding on the ‘comparator group’, the parties will need to think about the following factors:

- Policy benefits. Are the products truly similar to those under review? Insurance products of the same type may contain different benefits. For example, the cover provided by different payment protection policies may be subject to different financial limits.

- Sales channels. How are the products being distributed? Insurance is sold through a variety of channels (eg by telephone, over the internet, by intermediaries or by insurers selling directly to the public), and different channels have different cost profiles.

- Promotions. Are the prices of the products ‘true’? The sellers of an insurance product may decide to make promotional offers for a limited period in order to stimulate sales. This may be done by discounting the price of the product by a set percentage or offering free cover during the first few months of the policy. Special-offer prices do not represent the prices that would normally be payable for products. Therefore the parties may wish to exclude discounted products from the benchmarking exercise.