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

A Mumbai-based life insurer sells term plans mainly through its own salaried sales staff and wants to add independent agents and a bank partnership. In value chain terms, what is the main strategic reason for adding these intermediaries?

The main reason is to reach more customer segments and geographies at lower fixed cost than building its own branches. Intermediaries give access to established relationships, but the insurer keeps product design, underwriting and regulatory responsibility, and still pays commission.

  1. ATo reach customer segments and geographies cheaply without building its own branch networkCorrect
  2. BTo remove the need for any product design or underwriting
  3. CTo ensure customers never compare prices with competitors
  4. DTo transfer the insurer's regulatory obligations to the intermediary
  5. To make the insurer's distribution costs fall to zero

Explanation

Intermediaries extend reach and give access to existing customer bases at a variable cost, avoiding heavy fixed investment in branches. They do not remove the insurer's design or underwriting functions, nor its regulatory responsibilities, and distribution costs are never zero because commission is paid.

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