For most products and services, increasing the price lowers the demand, and decreasing the price increases the demand. However, this is not a universal truth, in that products like insurance function a bit differently. That is, increasing the price of insurance premiums does not necessarily decrease the demand, and, likewise, cheaper insurance premiums does always drive up the demand. This happens because of three reasons: consumer preference, control of the market by insurance, and the nature of the insurance marketplace. Therefore, what follows below is a look at how the effects of raising or lowering prices on insurance premiums affects supply and demand.

First of all, consumers pay insurance premiums every month in exchange for certain insurance, in that they get compensated for different types of problems or disasters. In general, the more they pay, the better insurance they receive, and the lower the premiums, the worse coverage they get. For many consumers, choosing a plan is a combination of the amount of coverage they receive and the price they have to pay for it. Therefore, changing the price does not necessarily change the demand for it, as the coverage still remains the same. That is, if a consumer makes his or her decision based more on the coverage and not the price, then his or her demand would remain more or less the same. Furthermore, some consumers seek out the best insurance as possible, and, if a particular insurance company raises their premiums, then some consumers might interpret this as being better insurance, thus raising the demand for these particular consumers. Likewise, lowering the price may deter some away from an insurance company, as the insurance appears to be not as good as another company’s. Therefore, given the above, the difference in premium price does not reflect a typical response from supply and demand.

Furthermore, in some cases, the insurance markets are dominated by one or a handful of insurance companies. This gives them the ability to essentially set they own prices, meaning any change in price is unlikely to have an effect on supply and demand. That is, in a monopoly, in which one company controls the market, or an oligopoly, in which a few companies control the market, consumers are forced to buy their insurance from these companies. This means that consumers cannot choose to go to another company, and, therefore, they are forced to pay whatever prices are chosen by the companies in control of the market. Therefore, if insurance companies raise their premiums, then consumers will have no choice but to pay the extra amount, meaning that supply and demand are likely not to be affected, although some consumers pay choose to opt out of paying for insurance all together.

Lastly, insurance companies are required by law, which varies depending on the country, state, city, etc., to allocate a portion of their surplus funds to covering the amount of potential liability they have taken on. That is, when they collect premiums, they have to set these aside to cover the payouts that they may have to pay, which makes sense from a legal standpoint, in that if they did not do this, the company may collapse, leaving many without the funding to cover their emergencies. Because of this, when insurance premiums rise in price, this gives insurance companies more surplus, and, likewise, when insurance premiums decrease, they have less surplus. This surplus also comes from outside investors that have chosen to invest in the insurance market, meaning that more profitable insurance companies receive more investments, giving them a greater surplus of capital.

However, there are a number of factors determining the price of insurance premiums, many of which the insurance company cannot control, such as natural disasters, which force prices up to cover the higher likelihood of damage. In a market like this, where there is a lot of external pressure on price, then the insurance company may need to allocate more funds to cover potential expenses, making investing in their company less attractive. Therefore, an insurance company cannot determine their premium prices entirely based on supply and demand. Rather, they need to be sure to make a profit, especially if they provide coverage in volatile areas, in order to continue to attract outside investment.

One of the basic tenets of economics is that price dictates supply and demand. That is, when price goes up, demand goes down, as people want the product less, and, when the price goes down, the product becomes more attractive to consumers. However, products like insurance premiums have other forces at work. As discussed above consumers need to have insurance coverage and so the price changes will not affect demand much, and some consumers are attracted by the high prices, as they believe it is naturally a better insurance plan. Also, some markets are controlled by a small amount of companies, forcing consumers to have less of a choice, making supply and demand artificial. And lastly, the price of premiums is influenced by many outside factors, so the price set by insurance companies may actually make the company more or less profitable, making them more or less likely to meet the demand. Therefore, overall, the effect of insurance prices on supply and demand can either make them go up, go down, or even stay the same, as it all depends on the confluence of the three factors discussed above.