The Hidden Cost of Bundling Insurance Policies

By | February 22, 2017

Marketers love to bundle products and for good reason. Bundling encourages consumers to buy more.

However, new research suggests that it’s not quite that simple. While bundling gets buyers to buy more, it can also make them less willing to pay more for the additional bundled items and more likely to be frustrated if a bundled item is taken away.

University of Chicago Booth School of Business Professor Ayelet Fishbach and Chicago Booth Ph.D. candidate Franklin Shaddy explore bundling in their study, “Seller Beware: How Bundling Affects Valuation.” In their study, to be published in Journal of Marketing Research, Fishbach and Shaddy define bundling as the sale of two or more individual products together, in one seemingly “whole” package.

Fishbach and Shaddy conducted six experiments in online shopping that examined what they refer to as “the asymmetric effect of bundling on valuation.” They created the perception of a bundle in different ways: by physically binding items together, by placing items in a container labeled as a bundle, by displaying items in close proximity, and by simply referring to objects as a bundle. In each experiment, the authors manipulated whether consumers evaluated bundles or the same products offered separately.

Fishbach and Shaddy used a variety of consumer products: Clif bars, chocolate truffles, holiday cards, sets of travel bags and baseball card collections.

While they did not use financial services or insurance products, as they later told Insurance Journal, they believe their findings apply to consumers when buying these products as well. In fact, they think the effects might be stronger.


What did they find? They found that there is an “asymmetry” that applies to the valuation of items offered as a bundle, or as they put it, “Consumers will demand more compensation for and experience greater dissatisfaction from the loss of items from bundles, compared to the loss of the same items in isolation.”

In other words, if only two of the three pieces of luggage a buyer ordered arrived in time for Christmas, that customer would feel particularly dissatisfied. Although the customer only wanted one suitcase when originally logging onto Amazon, the bundled set of products became one “whole” product in the customer’s mind. Therefore, in losing one of these products, the Christmas gift feels incomplete.

“Yet,” Fishbach said, “consumers will offer lower willingness-to-pay for and experience less satisfaction from items added to bundles, compared to the same items purchased separately.”

Demanding More

This illustrates the asymmetric effect of bundling on valuation: despite demanding more for losses from a bundle, consumers are not willing to pay more for additional items added to bundles. Likewise, adding an item to a bundle does not excite consumers as much as losing an item from a bundle frustrates them.

The authors contend that this creates a predicament for marketers. While the bundling concept is popular because it encourages buyers to purchase more products, it also makes consumers demand more service.

“For bundles, consumers both pay less, yet demand more,” said Fishbach.

This disparity could change the way marketers approach bundling products and services for consumer purchase. Fishbach and Shaddy suggest that sellers should take this study into consideration when making pricing decisions. They emphasize that while bundling is used to earn companies more money, the payoff might come with a cost.

“To the extent that bundles are offered because marketers wish to entice consumers with discounts, firms should be aware that when a component of a bundle fails or is unavailable, consumers can become more dissatisfied and demand more compensation than those who experience identical losses for non-bundled products or services,” said Fishbach.

Insurance Bundles

Insurance Journal asked the University of Chicago professors about their research and bundling in insurance where personal lines insurers frequently give discounts to those buying both home and auto coverages together.

“Generally speaking, I think our predictions would hold for financial services products. 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,” Shaddy told Insurance Journal.

He said he thinks there is a “lot of room for the ‘gestalt’ mechanism” to operate in this context and cited an example of an insurer offering a bundle of insurance products that covers all needs similar to a car dealership offering a comprehensive service package.

“[T]hat peace of mind for the consumer is probably fairly important,” Shaddy said. “Knowing that all of your potential issues are taken care of with one company should be compelling. This is akin to selling an insurance ‘solution’ that takes care of everything, whether it’s home, auto, boat, or something else. When it comes to insurance, people probably really value that sense of having a complete solution.”

At the same time, given that customers probably have a strong impression of these insurance bundles as “wholes,” policyholders are probably very sensitive to losing any piece of their coverage. “Once you have an insurance bundle that covers everything, you are likely way more resistant to switching one component, such as auto insurance, to another company, just because you see a better rate, for example. You would ruin the sense of having everything ‘taken care of,’ so to speak, with one company.”

Fishbach said he agrees with Shaddy and together the two researchers predict there could be similar — if not larger— effects for financial services products than for consumer goods. This, they explain, is so for two reasons: “because consumers definitely expect bundle discounts in this domain — so adding to bundles will yield less willingness to pay — and because there is a greater sense of risk, meaning that people would really not want to lose coverage for a specific item from a bundle.”

J.D. Power

Others have looked at insurance bundling. Researchers at J.D. Power uncovered some generational differences in consumer enthusiasm for bundling. Their research found that while policy discounts are most often the driver of bundling, attention to the overall customer experience is also important, particularly for Gen Y consumers.

Just 65 percent of Gen Y homeowners insurance customers bundle multiple policies with their insurer, compared with an overall bundling rate of 78 percent among all generations, according to the J.D. Power 2015 U.S. Household Insurance Study. The 2015 report suggests that Gen Y homeowners, who were born between 1977 and 1994, are less likely than older or younger customers to bundle their insurance policies with a single insurer because they are less satisfied with their homeowners insurers than others.

Gen Y satisfaction has been hurt by lower satisfaction with the interaction, billing and payment, and claims factors. Gen Y customers are also more influenced to bundle if a carrier has outbound communications and provides a problem-free experience, according to J.D. Power.

“Understanding the challenges and opportunities that Gen Y customers represent is a key component to developing a bundling strategy,” said Valerie Monet, director of the insurance practice at J.D. Power. “Gen Y customers, for instance, unbundle to receive better coverage and price more often than Boomers, underscoring the importance of straightforward communication about price, as well as the policy and what it covers.”

Nearly half (48 percent) of Gen Y customers unbundle for price and 32 percent unbundle for better coverage, compared with 41 percent and 19 percent, respectively, of Boomers who unbundle for these reasons, according to J.D. Power.

But Gen Y, which is estimated to be the largest customer segment of home buyers in the U.S., may yet come around. The authors contend that as Gen Y customers mature and their insurance needs become increasingly complex, insurers will have an opportunity to cross-sell additional products.


Topics Carriers

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