Acquisition Costs
Whenever you buy or acquire anything there is a cost involved. In the Insurance business it is no different. Insurance companies have to compete against one another to obtain your business; especially in the short-term insurance market such as car insurance and householders (content) there are a number of players in a competitive market. Acquisition cost in insurance refers to the cost that relate to the acquisition of the insurance business.
Acquisition costs include the cost to gain and retain insurance business. In short term insurance a large percentage of business is obtained through intermediaries (agents and insurance brokers) and they earn commission on the business they introduce to the company. Advertising and marketing costs also form part of acquisition costs, just think of how often you hear or see an advert for car insurance. Then there is the cost of processing the new business; this will include the issuing of the policy and inspection costs (applicable in car insurance.) The cost of processing existing business, such as completing renewals, is also included in acquisition costs.
Like any other business insurance companies try to keep their costs low, one way in which they are doing this is by making use of cheaper ways to sell their insurance products, such as direct business through the internet.