The price of a service
Selling an insurance policy can take quite a bit of time and effort – the intermediary often has to visit a number of potential clients (most of the time after hours) before a sale is achieved, while competition can be fierce.
The same, however, is true for any sales person – regardless of whether the product being sold is a microwave, a house, or simply getting you to switch your Internet service provider. Companies need sales to survive and therefore employ sales persons to sell their products – and we should be happy with this as more companies mean more competition with a wider product choice at a lower price.
But why does this simple economic principle so often go wrong when the product being sold is insurance? It is outrageous, to say the least, to see how much money insurance companies pay to unskilled intermediaries for selling inappropriate insurance products to the uninformed and trusting public.
It is reasonably simple to determine the value of a service (in this instance the value of obtaining advice from an insurance intermediary). The value will depend on factors such as:
- the basis of the advice given (charged per hour, or charged only in event of a successful sale)
- the training and/or qualifications of the intermediary (is the intermediary a PhD economist or simply someone selling policies part-time to supplement his or her income)
- the time spent on the sale (is it a simple, compulsory insurance product which must in any case be bought or does it involve specialist advise e.g. choosing a range of funds to invest in or between different cover/deductible options)
- supply and demand factors as for any other product traded in the market (number of insurers, their products, number of intermediaries, etc.)
- subjective matters will also come into play e.g. the value that the buyer (policyholder) and seller (intermediary) place on the service
Unfortunately, in practice none of the above factors has any influence on the price of the service of selling an insurance policy – simply because the price is not known. And even if it is known to some extent, the buyer (policyholder) has no idea how it was determined – and therefore is not in a position to influence the price at all.
Furthermore, the buyer (policyholder) usually has no idea whether the service (insurance advice) was good or not, simply because insurance can be rather complex which means that the policyholder typically has no idea what he is buying (and even worse, the intermediary sometimes does not understand what he is selling!).
In other words, free market principles usually do not apply when buying and selling insurance.
More about the price of insurance advice in a future blog.