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

A large Indian bank sells a single insurer's savings products to its depositors and receives most of its commission from that insurer. An actuary at the insurer notices that the bank's staff are steering customers with short horizons into a product with a long lock-in because it pays the highest commission. Which strategic concern is most directly raised?

The key concern is misalignment of intermediary incentives with customer needs. High commission on an unsuitable long lock-in product encourages mis-selling, which leads to complaints, early surrenders and reputational and regulatory risk for the insurer.

  1. AMisalignment between intermediary incentives and customer needs, creating mis-selling and reputational risk for the insurerCorrect
  2. BA reduction in the insurer's bargaining power over its reinsurers
  3. CA weakening of the insurer's brand because the bank has too few branches
  4. DA breach of the rule that insurers may use only one distribution channel
  5. An improvement in customer needs matching due to higher commission

Explanation

Commission structures that reward products unsuited to the customer's horizon encourage mis-selling, leading to lapses, complaints and reputational damage. The other options are unrelated to the facts or are incorrect statements about channels.

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