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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

A private general insurer in India finds that its sector has many firms, slow market growth, high fixed costs and products that customers see as undifferentiated, so firms regularly cut prices to hold volume. Which conclusion about the industry using Porter's framework is most justified?

Rivalry among existing competitors is intense and lowers profitability. Many firms, slow growth, high fixed costs and undifferentiated products push insurers into price cutting to protect volume. The other conclusions do not follow from these facts, as they concern entrants, suppliers or buyers without supporting evidence.

  1. ARivalry among existing competitors is intense, which depresses industry profitabilityCorrect
  2. BThe threat of new entrants must be low because growth is slow
  3. CSupplier power is the dominant force because costs are fixed
  4. DBuyers have no power because the products are regulated
  5. The industry is attractive because price cuts expand total demand

Explanation

Many rivals, slow growth, high fixed costs and undifferentiated products are classic drivers of intense rivalry and price wars, which erode profits. Slow growth does not by itself imply low entry threat, and the other claims do not follow from the data.

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