Quantifying Search and Switching Costs in the U.S. Auto Insurance Industry

Professor Elisabeth Honka, The University of Texas at Dallas, Mittwoch, 28.03.2012, 12.15 - 13.30 Uhr. Seminarraum Schwerpunkt Marketing (RuW 1.201)

This paper empirically distinguishes between search and switching costs in the context of consumers' choices in the U.S. auto insurance industry. Our data contain information on respondents? search behavior in terms of their consideration set of insurance providers; the corresponding premia for those providers; the actual provider chosen; the identity of the previous insurer and the demographic and psychographic characteristics of the consumers and their policies. We develop an integrated utility-maximizing model of consumers' decisions of how many companies to search; the identities of these companies and from which company to purchase. Our modeling approach rationalizes the observed consideration set as being the outcome of a search process by a consumer. We find that there are substantial search and switching costs in the U.S. auto insurance industry. The cost of collecting a price quote through an online channel is $40, the cost of collecting a price quote offline varies from $115 to $140. The average switching costs a consumer incurs are $130. We find consumer search costs and customer satisfaction to be the two main drivers of the high retention rate observed in the U.S. auto insurance industry. Implications for auto insurance companies regarding customer satisfaction and pricing are explored.