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IAI Actuarial Core Principles · Business Management · Business and consumer needs, the industry value chain and competitive forces

A consultant analyses the Indian motor insurance market. Findings: (i) many insurers of similar size sell near-identical cover; (ii) products are largely undifferentiated; (iii) the market grows slowly; (iv) insurers' large fixed investment in distribution makes exit costly. Which conclusion about industry rivalry is best supported?

Rivalry is intense, chiefly on price. Numerous similar competitors, undifferentiated products, slow market growth and costly exit all push firms to fight for share and stay in the market despite poor returns. Each of the four findings individually raises rivalry, so the combined effect is strong.

  1. ARivalry is intense, mainly on price, because of the number of similar competitors, low differentiation, slow growth and high exit barriersCorrect
  2. BRivalry is weak because the market is slow growing and so firms avoid competing
  3. CRivalry is weak because high exit barriers discourage competitors from staying
  4. DRivalry is intense only because of the fixed investment, the other factors being irrelevant
  5. Rivalry cannot be assessed without knowing the threat of substitutes

Explanation

Many balanced competitors, undifferentiated products, slow growth and high exit barriers each raise rivalry, as firms fight for share and stay in the market despite poor returns. Slow growth intensifies rather than reduces rivalry, and high exit barriers keep firms in rather than driving them out.

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