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

A health insurer offers the same one-year cover at Rs 12,000 to salaried customers who buy through a corporate group scheme and Rs 15,000 to individuals buying directly. Which condition is most essential for this price difference to raise the insurer's profit?

The key conditions are that the firm can keep the segments apart so cover cannot be resold, and that the groups have different price elasticities of demand. Without different elasticities or separation, charging different prices would not raise profit.

  1. AThe insurer can prevent resale or transfer of cover between the two groups, and the groups have different price elasticities of demandCorrect
  2. BThe marginal cost of serving each group differs by exactly the price gap
  3. CBoth groups have identical price elasticities of demand
  4. DThe insurer is a price taker in a perfectly competitive market
  5. Demand from both groups is perfectly inelastic at every price

Explanation

Third-degree price discrimination needs market power, the ability to separate groups and prevent arbitrage, and different elasticities. If elasticities were identical, the profit-maximising prices would be the same. A price taker cannot set differing prices.

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