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

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

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.

Suggested Citation

  • Li, Chu-Shiu & Lin, Chih Hao & Liu, Chwen-Chi & Woodside, Arch G., 2012. "Dynamic pricing in regulated automobile insurance markets with heterogeneous insurers: Strategies nice versus nasty for customers," Journal of Business Research, Elsevier, vol. 65(7), pages 968-976.
    • Handle: RePEc:eee:jbrese:v:65:y:2012:i:7:p:968-976
    DOI: 10.1016/j.jbusres.2011.04.015
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    References listed on IDEAS

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    1. Chu-Shiu Li & Chih Hao Lin & Chwen-Chi Liu & Emilio Venezian, 2010. "Pricing Effectiveness and Regulation: An Examination of Premium Rating in Taiwan Automobile Insurance," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(S1), pages 68-81, December.
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    Cited by:

    1. van Cranenburgh, Sander & Chorus, Caspar G., 2017. "Willingness to Pay-inference in the absence of rejected propositions," Journal of Retailing and Consumer Services, Elsevier, vol. 39(C), pages 35-42.
    2. Martin Eling & David Pankoke, 2016. "Costs and Benefits of Financial Regulation: An Empirical Assessment for Insurance Companies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 41(4), pages 529-554, October.
    3. Wenhui Zhang & Yongmin Su & Ruimin Ke & Xinqiang Chen, 2018. "Evaluating the influential priority of the factors on insurance loss of public transit," PLOS ONE, Public Library of Science, vol. 13(1), pages 1-11, January.

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