Non-risk price discrimination in insurance: market outcomes and public policy

Thomas, R. Guy (2012) Non-risk price discrimination in insurance: market outcomes and public policy. Geneva Papers on Risk and Insurance - Issues and Practice, 37 (1). pp. 27-46. ISSN 1018-5895. (Full text available)

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http://dx.doi.org/10.1057/gpp.2011.32

Abstract

This paper considers price discrimination in insurance, defined as systematic price variations based on individual customer data but unrelated to those customers’ expected losses or other marginal costs (sometimes characterised as “price optimisation”). An analysis is given of one type of price discrimination, “inertia pricing,” where renewal prices are higher than prices for risk-equivalent new customers. The analysis suggests that the practice intensifies competition, leading to lower aggregate industry profits; customers in aggregate pay lower prices, but not all customers are better off; and the high level of switching between insurers is inefficient for society as a whole. Other forms of price discrimination may be more likely to increase aggregate industry profits. Some public policy issues relating to price discrimination in insurance are outlined, and possible policy responses by regulators are considered. It is suggested that competition will tend to lead to increased price discrimination over time, and that this may undermine public acceptance of traditional justifications for risk-related pricing.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculties > Science Technology and Medical Studies > School of Mathematics Statistics and Actuarial Science > Actuarial Science
Depositing User: R.G. Thomas
Date Deposited: 07 Jul 2012 13:08
Last Modified: 10 Jun 2014 08:43
Resource URI: http://kar.kent.ac.uk/id/eprint/29803 (The current URI for this page, for reference purposes)
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