IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector
A new Indian digital insurer deliberately prices its motor cover below the cost-recovery level in the first two years, aiming to build a large customer base quickly and accepting early losses. Which pricing objective is it mainly pursuing?
The insurer is pursuing market share growth. Pricing below cost-recovery to attract many customers quickly, and accepting losses in the early years, signals a growth objective rather than short-run profit maximisation, a target return, price stability or simple survival.
- AProfit maximisation in each period
- BTarget rate of return on capital
- CMarket share growthCorrect
- DPrice stability within the industry
- Survival through covering variable costs
Explanation
Accepting early losses to build a large customer base shows the objective is growth in market share, usually with later profits in mind. Short-run profit maximisation or a target return would not justify below-cost pricing.
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