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

A pension-fund manager in India notes that clients are increasingly placing savings in direct equity mutual funds and digital gold instead of traditional endowment plans offered by life insurers. Under Porter's Five Forces, what is the most appropriate way to describe this and the insurers' likely response?

This is a rising threat of substitutes. Mutual funds and digital gold meet the same saving need in a different form, so customers can switch away from endowment plans. Insurers should emphasise distinct features such as protection and guarantees, or redesign and reprice products.

  1. AA rising threat of substitutes; insurers should stress distinct benefits such as protection and guarantees or adjust price and productCorrect
  2. BA rising threat of new entrants; insurers should lobby to raise capital requirements for mutual funds
  3. CRising supplier power; insurers should negotiate harder with mutual funds
  4. DFalling buyer power; insurers can safely raise premiums
  5. Falling rivalry; insurers can reduce marketing spend

Explanation

Mutual funds and gold meet a similar customer need (saving) through a different product, which is a substitute. Insurers can respond by differentiating on protection and guarantees or by repricing and redesigning products. The other options misidentify the force or draw an unsupported conclusion.

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