In a development that is sure to rankle life insurers, researchers found that the growth of the Internet can reduce term life prices by 8% to 15%. The authors say they provide the first empirical evidence that online comparison shopping affects offline prices."Our research shows that Web sites are making the term life insurance business more competitive," says Austan Goolsbee, co-author of the study and associate professor of economics at the University of Chicago.

"Because more consumers can now do price comparisons online, all companies, even those not on the Internet, can expect severe price pressure."

Goolsbee co-authored the study, "Does the Internet Make Markets More Competitive? Evidence from the Life Insurance Industry," with Jeffrey R. Brown, assistant professor of public policy at Harvard University in Cambridge, Mass.

Falling prices

The two researchers say they decided to study the term life insurance industry because the industry experienced serious price declines of about 27% during the 1990s. This decline took place concurrently with the rise of the Internet and particularly the formation of a number of insurance-oriented Web sites in 1996 that provided consumers with access to online quotes for term life products.

The researchers used individual policy-level micro data on prices of insurance policies, as well as numerous owner and policy characteristics. They then matched that information to micro data on the growth of Internet usage and online insurance research.

"We can't argue that the Internet was responsible for the entire industry-wide price decline in the 1990s, but it definitely explains a significant share of the decline," Brown says.

The research indicates that the frequency of use of online insurance Web sites by a particular group of consumers is proportional to the rate of price declines for term life insurance for that group.

Although the study found that only few consumers actually buy term life insurance online, Brown says the results are still significant.

"Many people mistakenly think that the Internet can't affect the overall insurance market because few transactions are currently conducted online," Brown says. "However, the Internet has already shifted the balance of power to the consumer, who now clearly benefits from price comparison information available online."

Several life insurers contacted for this article, including Nationwide, Lincoln National and Allstate, declined to comment on the study's results.

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