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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A general insurer offers a motor policy with a low premium and high deductible, and another with a high premium and zero deductible, letting customers choose. This approach is best described as which of the following?

This is second-degree price discrimination. The insurer offers a menu of contracts and customers self-select according to their risk and willingness to pay, which reveals information the insurer cannot observe directly, instead of the insurer assigning prices to groups.

  1. ASecond-degree discrimination through self-selection using a menu of contractsCorrect
  2. BThird-degree discrimination by age group
  3. CFirst-degree discrimination by individual reservation price
  4. DA cartel pricing arrangement
  5. Marginal cost pricing

Explanation

The insurer does not observe each customer's risk or willingness to pay, so it offers a menu and customers reveal their type by the option they choose. This is second-degree discrimination, as with quantity discounts. Third-degree requires the seller to assign groups itself.

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