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Foundations of Casualty Actuarial Science

insurer may have a large percentage of a certain group
of business. It then needs to raise its rates, or else it will
be unprofitable for other groups of businesses. However,
on raising the rates, it may drive out his customers to
other insurers providing lower rates. This in turn,
increases its costs and require a further rate increase,
or could even threaten solvency.

Abolition of rating variables may have social
consequences . To some extent, abolition creates
subsidies. Also insurers may voluntarily insure
underpriced groups. Otherwise, residual market will
expand.

Since most of the residual markets are subsidized by
voluntary market, subsidies will be created. Such
subsidies, deriving from legislatures are tax-in-kind.
Certain insured pay more than is required to balance
those who pay less.

There is a redistribution of income from disfavoured
group to the favoured group. In addition to subsidies,

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