Canadian Chpt 16, Adverse Selection

Question 1

Pricing alternatives to minimize adverse selection

Answer 1

1. Risk-based pricing
   
   1. 1 used in medical and DT through tiered pricing
   2. 2 why don’t all grp life plans recognize age, gender, smoker
      
      1. 2.1 administering diff prem schedules increases cost
      2. 2.2 premiums by gender may be prohibited someday
2. ER subsidization - higher participation helps spread the risk
3. Anticipating Adverse Selection in Pricing
   
   3. 1 adjustment of the price tags for anticipated experience
   4. 2 loading the prices of the lesser-valued options
   5. 3 push cost adverse selection into the highest-valued option
   6. 4 spreading cost adverse selection over the price of all options
4. May encourage adverse selection to phase out on option

Question 2

Design approaches to minimize adverse selection

Answer 2

1. Limit the frequency of choice
2. Limit the degree of change
3. Level the spread between options
4. Require proof of insurability before increasing coverage
5. Group certain coverages together
6. Delay full payment
7. Offer a HSA
8. Maintain parallel design
9. Test the program with employees. Not a design restriction