Car Insurance Discounts

Discounts help companies learn about consumers’ behaviors. For instance, auto insurance companies provide discounts based on safe driving and grades. Are certain age groups more likely to trade their personal data for discounts?

In general, younger consumers, as in millennials or younger, are more open to trusting online entities and willing to share their data in exchange for access to free services, tailored discounts or search results, and overall a more customized and efficient online experience. In the case of auto insurance discounts, this is the group that is usually considered riskier and pays the highest premiums, so getting a discount in exchange for data may be a win-win.

How might the perception of a good deal or discount, even if there is risk associated with it, impact someone's buying decision? How does that compare with the perception of a low price with no discount?

I think this depends on who is offering the discounted or lower price. If it is a market-leading firm, then consumers may still trust the brand and find the opportunity appealing. If the offerer is a less known or suspect brand, then this discounted or lower price may be perceived as risky and not trustworthy, which may lead consumers to second-guess or at least to further scrutinize the details of the offering. This may also apply to credible brands offering discounted or lower prices if these truly deviate from what a consumer considers normal.

Are discount and/or reward programs, such as accident forgiveness or safe driving discounts, more beneficial to attract new customers or to help maintain a current, loyal consumer base?

These are both persuasive tools to attract new customers and to maintain current ones as long as the prices are competitive. Some consumers do not bargain on their insurance, as this is a not highly involving product category despite its relatively high price. These are the consumers who may stay indefinitely with a brand unless the price becomes prohibitive. There are other consumers who like to shop around every six or 12 months, especially if they see an ad with this type of offering or if their premium goes up even if just slightly. For these consumers, being exposed to this type of appeal either by their current or prospective provider can be very persuasive.

A recent survey by ValuePenguin revealed that nearly 30% of women had never taken advantage of an auto insurance discount, compared to only 13% of men. Can you elaborate on why you believe there may be a gap in those taking advantage of these types of loyalty programs?

In general women are more involved with shopping, which will lead them to look for discounts more than men. This applies to department store shopping, groceries, etc. Interestingly, auto is an exception, as cars are more involving to men than to women, hence men will shop around more when buying cars, insurance, etc. For couples, men may also be in charge of handling car-related purchases, hence their higher likelihood of having taken advantage of discounts in this product category.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

Past work has shown that consumers are very sensitive to the presence of a discount and not always as much to the magnitude of the discount, especially for not highly involving product categories like insurance. Given this, they may overspend on car technologies that may cost hundreds and just deliver discounts in the tens. Additionally, if the consumer truly desires acquiring the technology beyond the opportunity of getting a car insurance discount, then this small discount may serve as a license to justify acquiring the technology. Past research has shown that some people like to pay for advanced technologies that they may not even use, so even better if a small discount helps justify the purchase.

Discounts help companies learn about consumers’ behaviors. For instance, auto insurance companies provide discounts based on safe driving and grades. Are certain age groups more likely to trade their personal data for discounts?

Research demonstrates that younger consumers are more comfortable with sharing since they have grown up in an environment in which it is relatively normal to trade, say, social media insights for the free use of Facebook and such. On the other hand, younger consumers are also a bit more digitally savvy, so they know more about when they are being tracked and how. This might also make them a bit more skeptical of these kinds of offers if they are perceived to be deceptive or misleading in any way.

How might the perception of a good deal or discount, even if there is risk associated with it, impact someone's buying decision? How does that compare with the perception of a low price with no discount?

There is some research in consumer behavior that shows discounting can affect quality perceptions. Of course, low-priced alternatives can also be perceived as lower quality when they are easily comparable to other options. So I think it would come down to whether consumers are doing a lot of price comparison-shopping for insurance, as I imagine they are. On the other hand, "quality" might not be easily evaluated for consumers when it comes to insurance. My guess is the bigger question is one of trust: Will the company take care of me when I need it? In this case, the more important question will be how discounting or everyday low pricing affects perceptions of trust for automobile insurance.

Are discount and/or reward programs, such as accident forgiveness or safe driving discounts, more beneficial to attract new customers or to help maintain a current, loyal consumer base?

In general, discounts are often used to attract new customers or bring back old ones. This is particularly important in an industry where the options are somewhat homogenous — there are many ways of packaging and customizing insurance, of course, but it is a mature product with a well-established business model that works very similarly across providers. It can be a bit hard for providers to differentiate themselves for customers in a way that might allow them to use a more premium pricing model. As far as reward programs, these are designed to maintain current customers. Reward programs work like anything else by reinforcing consumers for the decisions they make — decisions to renew a policy or, as we are seeing increasingly, safe driving decisions. Given that safe driving discounts are relatively new, I do think it is an interesting question as to how effective they might be in attracting new customers. I imagine that drivers who already know they drive safely might find this an appealing promotional strategy. For unsafe drivers, the more interesting question would be whether it actually promotes behavior change.

A recent survey by ValuePenguin revealed that nearly 30% of women had never taken advantage of an auto insurance discount, compared to only 13% of men. Can you elaborate on why you believe there may be a gap in those taking advantage of these types of loyalty programs?

If I knew nothing about the product, I would assume that any consumer more likely to take advantage of a discount may have evaluated the product less carefully. That is, discounting is sort of a low-effort consumer strategy — it works when consumers don't care as much about the specific product attributes, or when they don't see competitors as highly differentiated. So this finding suggests to me that women are evaluating insurance options more carefully than men, perhaps. This could mean women are more careful shoppers in general, or it could mean that men and women perceive insurance, as a product, differently. For instance, a consumer that sees insurance as a purely utilitarian product may just make a quick cost-benefit calculation and be tempted by a discount. But insurance is also a product that could be associated with needs and motives related to safety, trust and belonging — needs that could motivate a deeper evaluation of the product.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

I think carefully segmenting the market is necessary here. A customer that is able to buy more car up front is, in theory, a customer of greater means — so this would reflect some pretty sophisticated financial reasoning. I would think transparency with this kind of consumer would be essential on the part of an insurance company.

Are discount and/or reward programs, such as accident forgiveness or safe driving discounts, more beneficial to attract new customers or to help maintain a current, loyal consumer base?

While safe driving discounts (like Progressive's Snapshot program) initially attracted a lot of new customers, their impact on customer loyalty is lasting, at least for safe drivers. Safe drivers receive a substantial discount based on their observed driving habits (using a telematics device). But only their current insurer — the one that monitored them — knows that they have such safe driving habits. Typically, no other insurer can offer a competitive price to these drivers, at least initially. If a consumer were to switch to another insurer with a safe driving discount, they would need to pay a higher price at least until they have been monitored long enough to verify that they indeed have safe driving habits. Moreover, many consumers dislike being monitored so closely. The consumer also faces a risk that the next insurer may not reach the same conclusion that the driver is so safe, and so the discount may be smaller.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

There are various insurance cost estimators one can use when factoring insurance costs into new car purchase decisions. However, one should be very careful. Some of the safest vehicles incorporate accident prevention technologies into the bumper and side mirrors of vehicles. While these technologies help prevent and lessen the impact of severe accidents, they are expensive to repair. Even a small accident can result in a large bill for vehicles with advanced safety technologies, which consumers end up paying a portion of through their deductible and higher premiums later on if they submit a claim.

Discounts help companies learn about consumers’ behaviors. For instance, auto insurance companies provide discounts based on safe driving and grades. Are certain age groups more likely to trade their personal data for discounts?

When providing discounts based on safe driving and grades, rather than considering different age groups, it may be helpful for insurance companies to consider the types of consumers that they are attracting with these discounts. If the information on safe driving and grades is verifiable (e.g., by requiring a formal report card or transcript), there might be a self-selection process where safe drivers and students with better grades are more likely to sign up with the company. However, a limitation is that if the information is not easily verifiable or is easily faked, the company may instead end up with an adverse selection problem where riskier individuals sign up in order to take advantage of the discounts.

How might the perception of a good deal or discount, even if there is risk associated with it, impact someone's buying decision? How does that compare with the perception of a low price with no discount?

Reference prices are often a powerful driver of consumer decisions, so seeing a discount or some percentage off the standard price may be much more attractive to consumers compared to simply a low price with no reference point. Another useful strategy for insurance companies hoping to outprice the competition is to advertise their lower prices alongside competitor prices, again establishing a reference point.

When it comes to products like car insurance, people often don’t shop around as much as they should, and also tend not to switch insurance companies, regardless of discounts or advertising from other companies. These frictions are often referred to as "search costs" and "switching costs," and can be quite high.

Elisabeth Honka, associate professor of marketing at UCLA, has done extensive research on this topic and has found that search costs and switching costs are important barriers to customers improving their insurance plans. This makes it even more important for insurance companies to emphasize discounts to break down these barriers and make consumers aware of the potential savings.

Are discount and/or reward programs, such as accident forgiveness or safe driving discounts, more beneficial to attract new customers or to help maintain a current, loyal consumer base?

During the early stage of the insurance purchase process, features of the program such as accident forgiveness or safe driving discounts may not be as top-of-mind to new customers as price discounts or free starting points in a reward program. Instead, these features will probably be more effective in retaining existing customers, who are closer to directly experiencing these benefits. The one exception might be new customers who have recently been in an accident and are specifically looking for programs that provide these benefits.

A recent survey by ValuePenguin revealed that nearly 30% of women had never taken advantage of an auto insurance discount, compared to only 13% of men. Can you elaborate on why you believe there may be a gap in those taking advantage of these types of loyalty programs?

One possibility for this gender gap is the difference in behavioral tendencies between men and women when it comes to negotiations. I would recommend an excellent book entitled "Women Don’t Ask" by Linda Babcock, a colleague and professor of economics here at Carnegie Mellon. This book delves into the many ways that women often find it hard to ask for opportunities, pay raises, better deals, etc., compared to their male counterparts due to a variety of social forces and inequalities. You can easily see how this might extend to everyday decisions such as asking for or taking advantage of an auto insurance discount or loyalty program.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

Let’s consider, for example, a device that tracks how many miles you drive. The device may cost some amount up front for the customer to purchase, and if they drive more, then they pay more for their insurance, and if they drive less, then they pay less. In this situation, the customer is potentially at risk of paying more if they drive more than anticipated, or not saving as much as they expected even if they drive less, and therefore not making up for the cost of the initial device purchase. Thus, it is very important for these types of discount programs to clearly represent the projected savings to the consumers and the costs versus benefits.

As these devices get more sophisticated, potentially relying upon complex algorithms to compute how "safe" a driver is and the insurance discount they have earned, transparency between the customer and firm becomes imperative, especially since customers are often giving up more and more of their private data. In my own research on how to define good explanations for algorithms, my colleagues and I find that customer satisfaction for financial decisions such as credit card or loan approvals can be sensitive to factors such as the complexity of the algorithm and the individual’s own realized outcomes.

Discounts help companies learn about consumers’ behaviors. For instance, auto insurance companies provide discounts based on safe driving and grades. Are certain age groups more likely to trade their personal data for discounts?

With rapid advancements in technology, I'm afraid that usage-based insurance (or UBI), may become more of the norm in the next five to 10 years.

Safe drivers and those that do not drive a lot (low mileages) may be automatically attracted to such schemes. Discount-prone customers across all age groups will also be attracted to such a policy. Across all age groups, younger individuals are more likely to trade their personal data for discounts, since they grew up in an era where we have very little privacy and are hence more comfortable sharing personal information.

How might the perception of a good deal or discount, even if there is risk associated with it, impact someone's buying decision? How does that compare with the perception of a low price with no discount?

This is based primarily on consumer personality. In retailing, studies have demonstrated personality differences in preferences for EDLP (everyday low pricing) versus high-low (deal) pricing. Similarly, while buying auto insurance, we might find similar differences. Younger customers are more likely to be deal prone (versus a not-so-exciting option of low price with no discount).

Are discount and/or reward programs, such as accident forgiveness or safe driving discounts, more beneficial to attract new customers or to help maintain a current, loyal consumer base?

They are obviously more beneficial to attract new customers, most of whom are comparison shopping for the best deals and are likely to make decisions based on the benefits offered. However, once enticed, it is important to maintain those discounts and/or reward programs (instead of a "bait and switch" approach) or risk losing their customers to competitors who might snag them with more lucrative deals.

A recent survey by ValuePenguin revealed that nearly 30% of women had never taken advantage of an auto insurance discount, compared to only 13% of men. Can you elaborate on why you believe there may be a gap in those taking advantage of these types of loyalty programs?

A recent study found that men pay slightly lower on average ($720 per year) on car insurance compared to women, who pay $739 a year, on average. These numbers do vary by age. Younger men (below the age of 25) pay much more than their female counterparts because of data showing riskier behavior by the former group. Older women, however, end up paying more than their male counterparts.

As far as taking advantage of auto insurance discounts is considered, I am not surprised that almost a third of women have never taken advantage of auto insurance discounts, compared to just 13% for men, primarily because they are socially conditioned not to ask. Recent research by Carnegie Mellon University economics professor Linda Babcock, co-author of the book "Women Don't Ask," showed that women are four times less likely than men to ask for a raise, and when they do ask, they ask for 30% less than men do.

There are at least seven states — California, Hawaii, Massachusetts, Michigan, Montana, North Carolina and Pennsylvania — that have laws in the books against discriminatory auto insurance pricing based on gender.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

I would advise auto insurance shoppers to be careful before using this upgraded technology and agreeing to be monitored because of significant privacy concerns. Drivers should comprehend the risks, since the insurance company will have information on your whereabouts, how you drive, what you're interested in, where you live and who you're associating with. The information is also likely to be sold to other third parties without the individual's knowledge. There is also the danger of data breach, which may give this data to miscreants.

For those willing to overlook these risks, it is important to know what exactly will be tracked by the UBI program. Will it be just braking, idling and acceleration, or will it also track mileage and monitor driving quality?

However, UBI methods appear to be gaining traction. A recent J.D. Power study indicated that nearly 12% of auto insurance customers used such programs, and that nine of the top 10 largest passenger auto insurers have UBI programs in place.

How might the perception of a good deal or discount, even if there is risk associated with it, impact someone's buying decision? How does that compare with the perception of a low price with no discount?

I might suggest that the perception of a good deal or discount might be more enticing to consumers than just a low price. I find myself more open to exploring a possible purchase when some sort of advantage is advertised.

Some car shoppers may be willing to shell out more cash up front to purchase upgraded technology, with the anticipation that an insurance discount will offset the splurge. At what point do discount programs become problematic for consumers?

Discount programs can become problematic when they are overly complicated and may have strings attached that are not fully understood. A parallel example might be the adjustable-rate mortgage, which caused many to secure loans that had low payments at first, unaware of balloon payments and higher interest rates that could lead to foreclosure (which sadly was the case for many).