If a dealer is selling vehicles to a clientele who have a high rate of non-payment/repossession episodes, is he justified in selling his cars at above-market prices and charging borderline usurious interest rates? Could he stay in business selling these cars to the same clientele if he cleared 10% on the sale? Could the lender continue to offer financing to this same clientele at a competitive rate, suffer losses due to non-payment of debt, and still remain in business?

An automobile insurance company has the latitude to vary its policy premiums based on prior loss experience. Say that you are a 45-year-old married male living in rural Kansas with a clean driving record and no accident history. Your annual premium for your 2010 Chevy Impala is $825 per year. The policy premium is set based upon prior loss experience. The same company is also insuring a 20-year-old unmarried male living in UES Manhattan who is driving a 2013 Porsche 911 Turbo Cabriolet. In the last year he picked up two speeding tickets for doing 95 in a 65. In your opinion, should that same insurance company offer an $825 annual premium to the Porsche owner? Their prior loss experience with this type of policyholder indicates that the likelihood of a six-figure claim in the next three years is about 60%.