Personal Finance

Why do insurers have different prices for similar products?


The use of different pricing factors by insurance companies has resulted in pricing differences across the industry. PHOTO | SHUTTERSTOCK

The use of different pricing factors by insurance companies has resulted in pricing differences across the industry.

While most clients only look at the overall limits and the price being charged when choosing or purchasing a product, there is a lot more that informs the rating for insurance products which this article seeks to demystify.

You may wonder why a proposal quotation issued by one insurance company, may have a significant price difference from another company for the same cover limits,

While the coverage limits may be the same across various companies, the sub-limits, policy terms and conditions could be the differentiating factor of these products.

For instance, with the same overall inpatient limit at company X and Y, the sub limits associated with the overall limits may be different. Say, when the overall Inpatient limit at company X and Y is Sh1 million for each, the pre-existing limit may be limited to Sh500,000 and Sh300,000 at company X and Y respectively.

The policy terms and conditions may also vary from one insurance company to another. These terms and conditions are what dictate the terms of usage and may be limiting to clients in some way.

Some of the limiting terms and conditions applicable to an insurance cover may include but not limited to co-payments for health insurance covers, deductibles, and excesses in general insurance policies.

In cases where the limiting terms are applicable, the prices can be cheaper in comparison to policies without these terms and conditions.

The geographical scope of the cover also contributes to the pricing difference. You may have noticed that local insurance products for which cover has been limited to local coverage are cheaper compared to insurance products with a larger geographical coverage that extends to the international world. This can be attributed to different economical state from country to country.

Another factor that companies base their pricing on is their historical/ past experience in the amount of claims paid vis a vis the current cost of doing business.

Historical experience may significantly vary from one company to the other due to various other factors such as the demographics of their clients’ base, geographical location and so on.

The historical claims experience significantly informs the amount of premiums insurance companies charge for their products and the prices may often be reviewed from time to time as a response to the prevailing economic conditions to maintain the profitability and continuity of the company.

This partly explains why premiums for an existing client may increase at the point of renewing cover if their claim experience for the past policy period is deemed to be poor.

Competition has also proven to be a huge factor in the pricing of insurance products. Insurance companies are keen to set rates and package their products in a way that they can actively compete in the market and allow them to easily market and sale their products.

Some companies have been seen to undercut their prices to maintain a competitive edge against their competitors.

As a loyalty reward, some insurance companies decide to extend special discounts to their long-term clients and clients who have several insurance covers with them. This is often a strategy to encourage their clients to purchase and place more business with them to enjoy the discounts.

The writer is a Senior Risk Consultant at Zamara and can be reached via [email protected]