Dynamic pricing in regulated automobile insurance markets with heterogeneous insurers: Strategies nice versus nasty for customers

Chu-Shiu Li, Chih Hao Lin, Chwen-Chi Liu and Arch G. Woodside

Journal of Business Research, 2012, vol. 65, issue 7, 968-976

Abstract: This study examines a phenomenon in one nation's automobile insurance market where insurers adopt diverse pricing strategies in this regulated industry that does not allow for such diversions—a homogeneous, insurance industry in which a government authority sets the official pricing formula as well as all of the rating factors. Insurers use a claim coefficient that reflects previous claim records of policyholder as an implicit pricing tool to over/under charge new and repeat customers. The aim here is not so much to blow-the-whistle on pricing practices that violate regulations but to describe execution details of the practices and their outcomes. The results show that firm-level, systematic, price variances that occur differ from prices that follow from applying regulated individual-claim coefficients. Based on the unique firm-level pricing strategies, this study finds that some insurers are more nice to new customers and nasty to repeat customers to increase market shares while other insurers earn high profits by being nasty to repeat customers. The assumption that a behavioral primacy effect may exist in the market may guide some firms' pricing strategies.

Keywords: Pricing strategy; Automobile insurance; Claim coefficient; Multi-period contract; Nice; Nasty; Customers (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:65:y:2012:i:7:p:968-976

DOI: 10.1016/j.jbusres.2011.04.015

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