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

A health insurer offers the same policy cover at a lower premium to employees of large corporate groups than to individual buyers, even though claims costs per person are the same. Which condition is most essential for this price discrimination to be sustainable?

The insurer must be able to separate the groups and stop switching or resale between them. Without this barrier, individuals would take the cheaper corporate rate and the price difference could not be maintained, so the discrimination would fail to raise profit.

  1. AIndividual buyers must be able to buy the corporate policy by claiming to be employees
  2. BThe insurer must be able to separate the two groups and prevent resale or switching between themCorrect
  3. CDemand elasticity must be identical in both groups
  4. DThe insurer must operate in a perfectly competitive market
  5. Marginal cost must be zero for both groups

Explanation

Price discrimination needs market power, differing price elasticities between groups, and an ability to keep the groups separate so that low-price buyers cannot pass the product to high-price buyers. If individuals could easily claim the corporate rate, the scheme would collapse. Identical elasticities would remove any gain from charging different prices.

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