Abstract
This paper looks at the demand of insurance products in the automobile industry. To find out about the market of insurance services, the market trends are briefly analyzed followed by the factors that affect their demand. The paper then goes ahead to discuss how insurance products are affected by pricing and whether they have complementary or substitute products. An analysis is also done on the importance of the demand to national income and unemployment. Finally, a discussion is done on the demand function for the auto industry.
Insurance is the purchase of security between two parties, the insured and the insurer with the insured agreeing to pay a given sum of premiums for the cover. The automobile insurance market is headed in the right direction. According to a research that consequently informed a projection, in the next five years, the industry expected to perform better and grow steadily (Schmidt, 2012). This trend is attributed the successive improvement in the macroeconomics environment benefiting the investors and key stake holders in the auto insurance industry.
More important, automobile insurance industry is currently considered to be at its mature stage (Schmidt, 2012). At this stage, few upgrades and changes in product lines, more stable market in addition to aggressive merger and take over are evident characteristics. In this economic period, such trends lead to gainful investments. Currently the measure of a given industry to the larger economy, industry value added (IVA) is postulated to grow annually at a 2.2% growth rate (Gao, Hensley, & Zielke, 2014). This rate has and will trough through the 10 year time period to 2020.
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"Demand in Auto Insurance Industry".
With that in mind, the paper herein will seek to address some key issues in the automobile market. First, an in-depth analysis of factors that affect the demand of auto insurance will be featured. Arguably, these factors together with price elasticity of the insurance product will inform a demand function that will be developed. Second, the extent of elasticity of auto insurance products to price will be revisited in an insightful approach. Third, the paper will identify substitute or complementary goods to the auto insurance products if any. Finally the implications of national income or unemployment to the auto insurance industry will be dealt with accordingly.
Factors affecting demand of auto insurance products
Law and regulation
There is a direct correlation between the number of divers that are uninsured and the amount of premium paid. In this regard, it is clear that the regulation governing the payment of premium in a way affects the welfare of people in the industry (Schmidt, 2012). Regulation calling for higher premiums would out rightly bar the low income earners from accessing insurance products (van Rossum, 2005).
Second, it is a requirement in almost all countries for automobile owners to purchase at least third party insurance policy (van Rossum, 2005). In reality therefore, the demand for this kind of policy is not optional rather a must. The above cases have a positive implication on the demand of auto insurance products.
Urbanization
Urbanization refers to the number of people living in urban area. In highly urbanized areas such as cities, the rate and likelihood of loses is alarming. A high population density leads to high risks especially for those with automobiles (Dionne & Harrington, 2014). For example, the jam density witnessed in cities facilitates the occurrence of collisions and other related accidents. Such uncertainties have a direct relationship with the demand for auto mobile insurance products.
Additionally, it is unlikely to find an unregistered automobile in such places. This implies that probably all auto mobiles in these areas have an insurance policy (van Rossum, 2005).
Number of registered automobiles
The number of registered auto mobiles forms a clear way of determining the demand base for auto insurance policy (Dionne & Harrington, 2014). The number of registered automobiles reflects the potential demand in this auto insurance industry. Consequently, the number of automobile registered has a direct correlation with the demand for auto mobile insurance (van Rossum, 2005).
Sensitivity of auto insurance products to prices
Auto insurance products are of various categories. There is the comprehensive insurance, personal injury insurance and third party insurance just to sample a few. It is vital for the issuers to have in-depth understanding of the price elasticity of demand of various products they offer. Though it is difficult to accurately determine price elasticity of demand, it can be observed that some policies are responsive to price changes than others (Zweifel & Eisen, 2012). There are various versions surrounding the price elasticity of auto mobile insurance demand. In a research pivoted on inverse loss ratio which uses the cost of each dollar necessary for administration of the insurance program, a negative correlation between price and auto mobile insurance demand was established (Zweifel & Eisen, 2012). Another research proposes that due to symmetries of information and individual information, the demand for auto insurance is imperfectly price inelastic (Zweifel & Eisen, 2012).
In other occasions where the purchase of a certain policy is a mandatory requirement required by law, the products will be purchased regardless of the current prices. In such cases, the demand for auto insurance policies are insensitive to price functions thus, price inelastic demand is established (Zweifel & Eisen, 2012).
Substitute product
The function of insurance policy is to enable redistribution of loses among the pool created. Most auto insurance companies have achieved this basic requirement. The insurance industry is competitive in terms of advertisement, policy reforms and rendering of their service to the insured (Schmidt, 2012). The perfect substitute for any auto mobile company is its immediate competitor (Zweifel & Eisen, 2012). To be indispensable though, a company must offer services that are cognizant of the needs of its customer. Premiums should be economical to the firm but affordable to the insured. The claim process should be easy without bureaucracy.
Complementary product
In the simplest form, complementary goods are goods that are used together (Zweifel & Eisen, 2012). For instance, the demand of a printer will give rise to the demand for ink. In the auto insurance market, in most countries to be exact, legislation are in place requiring owners of automobiles to purchase an insurance cover. Either third party, personal in case of private owner or comprehensive cover. In this regard, the demand for an automobile necessitates the demand for auto insurance cover in equal measure (Dionne & Harrington, 2014). Therefore, an automobile qualifies to become a complementary product of an auto insurance product.
Implications of income and unemployment on the demand of auto insurance products
Income
As a hypothesis, income affects the demand for auto insurance products positively (Zweifel & Eisen, 2012). In a research covering 45 countries both developed and undeveloped, a positive relationship between income and the demand for property, liability and motor vehicle insurance was realized (Schmidt, 2012). In another research, it was established that there exists a positive correlation between gross national product per capita and the demand for automobile insurance products (Zweifel & Eisen, 2012).
Contrary to the above hypothesis, other findings have proposed a different hypothesis. In this assertion, auto insurance is viewed as a necessity purchase occasioned by provisions in the law (Zweifel & Eisen, 2012). As a result the demand in a more accurate approach is insensitive to income. Other policies like those covering personal injuries are income dependent.
Unemployment
Unemployment has various implication in the economy of a country and the auto insurance industry is no exception (Gao et al., 2014). Holding other factors constant, employment directly determines the purchasing power of an individual. Therefore unemployment has a negative implication on the demand of auto insurance product (Zweifel & Eisen, 2012).
Demand function for auto insurance industry
Demand function relates the quantity demanded of a given product to the price of the product or prices of other related products (Zweifel & Eisen, 2012). Herein is a simple formulated demand function for the auto insurance products from the above discussion.
Qd = f (price, income, premiums, GDP, sale of complementary product .i.e. automobiles)
In conclusion, it is evident that microeconomic environment is operating in the favor of factors that boost auto insurance industry (Zweifel & Eisen, 2012). Therefore, the growth of the industry projected to thrive up to the year 2020 (Schmidt, 2012). Various factors such as prices, income and unemployment have a bearing on the demand of auto insurance products. Their role is indispensable. In a snap short, the demand function relates the quantity of the auto insurance demanded in relation to its own price and that of related products.
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