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

A motor insurer introduces a telematics device that records driving behaviour and links the premium to measured driving. Which economic effect is the primary purpose of this change?

The purpose is to reduce information asymmetry. Measured driving data lets the insurer price each driver by actual risk and rewards safer behaviour, which also reduces moral hazard. It does not remove capital requirements or make the market perfectly competitive.

  1. ATo raise barriers to entry by making the product more complex
  2. BTo reduce information asymmetry so premiums reflect individual risk and encourage safer drivingCorrect
  3. CTo move the market toward perfect competition by making all drivers identical
  4. DTo eliminate the insurer's need to hold any capital against claims
  5. To create a public good that rival insurers cannot use

Explanation

Telematics gives the insurer data on individual risk, reducing hidden information and enabling risk-based pricing. It also lessens moral hazard, as safer driving earns lower premiums. It does not remove capital needs or make drivers identical.

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