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

A motor insurer introduces a no-claims discount that rises with each claim-free year. From an information-economics view, what is its main purpose?

The discount gives policyholders a financial reason to drive carefully, reducing moral hazard, and the accumulated claims record helps the insurer separate good from bad risks over time. It does not eliminate information asymmetry or equalise premiums across customers.

  1. ATo remove all asymmetric information before the policy starts
  2. BTo give policyholders an incentive to take care and to reveal their risk type through claims historyCorrect
  3. CTo ensure all customers pay an identical premium
  4. DTo increase the insurer's reserves by raising the average premium
  5. To eliminate the need for underwriting

Explanation

A no-claims discount rewards careful behaviour, which reduces moral hazard, and builds a claims record that acts as a signal of risk. It does not remove asymmetry entirely, nor does it equalise premiums, since customers with different records pay different amounts.

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