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

A mid-sized Indian general insurer relies on a single reinsurance group for most of its catastrophe cover. The reinsurer has raised rates sharply, and few other reinsurers have the capacity or appetite for this risk. Which assessment under Porter's Five Forces is most appropriate?

Supplier power is high. The reinsurer supplies an essential input, few other reinsurers can provide the cover, and switching is hard, so it can raise prices. The insurer being the reinsurer's customer does not give it strength when it has so few alternatives.

  1. ASupplier power is high because there are few alternatives and switching is difficultCorrect
  2. BBuyer power is high because the insurer is the customer of the reinsurer
  3. CThreat of substitutes is high because reinsurance is a commodity
  4. DRivalry is low because the reinsurer is a single firm
  5. Threat of new entrants is high because reinsurance has no barriers

Explanation

Reinsurance is an input to the insurer's business, so the reinsurer is a supplier. Concentration of suppliers, few alternatives and high switching difficulty indicate high supplier power. Being a customer does not give the insurer power when alternatives are scarce.

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