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

A Pune-based general insurer finds that, across its motor insurance value chain, the stage with the lowest margin and least differentiation is claims repair, handled through a large network of garages. It decides to outsource repair management to a specialist firm and concentrate on underwriting and distribution. Which is the strongest strategic rationale for this decision?

The strongest rationale is focus: outsourcing a low-margin, undifferentiated stage lets the insurer concentrate on underwriting and distribution where it has advantage, while a specialist with scale runs repairs. It does not remove supplier dependence or guarantee lower premiums, and it creates a new supplier relationship.

  1. AIt removes the insurer's dependence on any suppliers
  2. BIt focuses resources on stages where the insurer holds competitive advantage and lets specialists with scale run the restCorrect
  3. CIt guarantees lower premiums for all customers regardless of claims cost
  4. DIt converts a primary activity into a support activity
  5. It eliminates the bargaining power of the specialist firm over the insurer

Explanation

Outsourcing non-core stages lets a firm concentrate on activities where it is advantaged, while specialists may have better scale. It does not remove supplier dependence; it creates a new one. It also does not guarantee lower premiums or remove supplier power.

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