Skip to content

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

A life insurer offers a menu of term plans: a low-premium plan with medical underwriting and a higher-premium plan without it, so that customers reveal their own risk type by their choice. Which description best fits this strategy?

This is self-selection, a screening menu of contracts in the spirit of second-degree discrimination. The insurer cannot see customer risk or willingness to pay, so it designs options that lead customers to reveal their type through their choice.

  1. ASelf-selection (second-degree style) screening through a menu of contractsCorrect
  2. BPerfect first-degree price discrimination based on known willingness to pay
  3. CPredatory pricing to remove competitors
  4. DCost-plus pricing with a fixed markup
  5. Limit pricing to deter entry

Explanation

The insurer cannot observe each customer's type, so it offers differing contracts and customers sort themselves. This is self-selection screening. First-degree discrimination requires knowing each buyer's reservation price, which is not the case here.

Did you get it right without looking?

One question tells you little. A timed set on Pricing strategies in the financial services sector shows your real accuracy, how long you take and where you lose marks.

Practise Pricing strategies in the financial services sectorFree diagnostic mock

More Pricing strategies in the financial services sector questions