How Insurance Prices Affect Consumers’ Purchase Decisions: Insurance Price as a Risk Signal

Abstract

Retailers, service providers, and manufacturers have discovered that complementary optional insurance is an attractive source of profit and frequently charge substantial insurance prices compared with the price of the product to be insured. The implicit assumption behind this pricing strategy is that product purchase decisions are independent of the insurance offer. The authors question this assumption and propose that consumers interpret the price of insurance as a risk signal with respect to the underlying product. Perceived risk, in turn, negatively affects consumers’ decision to purchase the product in a given purchase situation. The results of a survey, three online experiments, and two studies using transactional data provide evidence for the proposed insurance price risk signal. The findings reveal that perceived risk mediates the link between the relative insurance price level and consumers’ decision to purchase the underlying product. Offering other optional add-ons and providing objective risk information weakens the insurance price risk signal.