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IAI Actuarial Core Principles · Business Management · Strategy, competitive advantage, strategic decision process and PEST analysis

A general insurer in India notes that the regulator has announced a proposal to raise the solvency margin requirement from the next financial year. The strategy team wishes to place this in a PEST analysis and to decide how to use it. Which approach is most appropriate?

The proposed solvency change is a Political/legal factor, since it is regulation, and the firm should assess its impact on capital, pricing and growth plans in advance. PEST deals with external factors beyond the firm's control, and its purpose is anticipation, not waiting.

  1. ARecord it as an Economic factor, because capital is a financial resource, and ignore it until the rule takes effect
  2. BRecord it as a Social factor, because it affects policyholders' confidence
  3. CRecord it as a Technological factor, because solvency is computed using software
  4. DDiscard it, because PEST covers only factors the firm can control
  5. Record it as a Political/legal factor and assess its impact on capital, pricing and growth plans before the rule takes effectCorrect

Explanation

Regulation and legislation fall under the Political (often extended to legal) element. PEST examines external factors outside the firm's control, and its value lies in anticipating their impact, so the firm should assess effects on capital and pricing in advance. Treating it as economic or waiting for the rule is wrong.

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