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New Research Demonstrates Potential Downsides of Selling Insurance Policy Bundles

by Precise Leads

February 27, 2017

Your clients love bundled packages, but only as long as they’re satisfied with the individual products in the bundle.

Across all industries, consumers love buying in bulk just as much as companies like selling bundled product packages. Bundling offers retailers a way to sell more items, whereas buyers prefer the convenience of obtaining goods from a “one-stop shop” (and at a discount, no less).

Of course, it’s never quite as simple as that when dealing with mercurial consumer preferences. Buyers have certain perceptions of the value they receive from those bundles, and those perceptions can change swiftly if one of the bundled items fails to deliver on its promise or is suddenly excluded from the package deal. Furthermore, once a bundled package is purchased, buyers are reluctant to fork over more cash in order to add more items to it.

These were just some of conclusions drawn from a recent University of Chicago research paper, titled “Seller Beware: How Bundling Affects Valuation.” Following a series of online shopping tests, the authors analyzed how consumers evaluated bundles of consumer products like candy bars and travel bags versus those same items sold separately. These experiments aimed to analyze what researchers identified as “the asymmetric effect of bundling on valuation.”

Asymmetry in Valuation

This asymmetry refers to the way in which consumers perceive items bought in a bundle versus how they perceive the value of a one-time purchase. Though buyers were initially happy to purchase in bulk, they were also quick to demand compensation for losses if one of items in the package disappointed them. In other words, one bad experience with one product soured them on the entire package. This attitude was less pronounced when the unsatisfactory product was purchased outside of a bundle.

Consumers also expressed a strong distaste for paying more to add another feature to the bundle. Overall, the researchers found that bundling items heightens consumers’ expectations of the products and services included in the package deal. “For bundles, consumers both pay less, yet demand more,” the authors concluded in the paper.

What This Research Means for Insurance Agents

Though the study focused on consumer products, the research applies to financial services and insurance products because insurance agents frequently cross-sell and offer discounts to clients who buy home and car policies in the same package.

“Generally speaking, I think our predictions would hold for financial services products,” study co-author Franklin Shaddy told the Insurance Journal. “Although we should emphasize that bundle discounts are very prevalent in this industry. This means that the expectation of price differences between bundled and non-bundled products is probably fairly strong.”

Consumers gravitate toward bundled insurance packages because they perceive an advantage in having one company handle all their policies in one complete solution, Shaddy noted. Accordingly, clients prefer to keep their insurance policies within a single insurer’s bundle, as opposed to switching out one unsatisfactory policy and going with another insurer. So, once sold, most of your clients will likely stay with the bundle for the long haul.

Yet that inclination comes with a caveat: Clients will be less receptive to sales pitches which add more features to the bundle at extra cost to them, and they are more sensitive to losing coverage if a policy is eliminated from the package. Because buying insurance policies carries more risk than purchasing a candy bar, your clients would be upset at the thought of becoming uninsured. As their agent, it’s your job to assure clients that you will service all policies in the bundle for as long as they want the coverage. The best course of action in the face of this new research is to continue offering bundled packages for your clients and only approach them with a new feature when there’s a strong value proposition.

The One Exception: Gen Y

A 2015 J.D. Power U.S. Household Insurance Study indicated some generational differences in how consumers perceive bundles. Born between 1977 and 1994, Generation Y homeowners bought fewer bundled insurance packages than other generations — 65% versus 78%, respectively. The reason, the study concluded, stems from Gen Y’s dissatisfaction with overall customer service.

Due to that disposition, Gen Y members are more likely to break a bundle into parts in search of a lower-cost policy that provides more coverage, “underscoring the importance of straightforward communication about price, as well as the policy and what it covers,” J.D. Power Insurance Practice Director Valerie Monet stated in the report.

Yet the J.D. Power study uncovered this interesting tidbit: 17% of Gen Y consumers said they “definitely” would be willing to purchase a bundle in the future. So, as your Generation Y clients age, they represent a growing demand for your bundled products.

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