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

An Indian health insurer traditionally sells through agents and pays hospitals directly. It is considering buying a chain of diagnostic clinics so that it controls part of the care delivered to its policyholders. In terms of the industry value chain, this move is best described as:

This is vertical integration, specifically moving backward into a supplier-side stage of the chain. The insurer is taking over a stage that supplies care services to its claims process, not buying a competitor at its own stage and not entering an unrelated business.

  1. AHorizontal integration, because both firms serve the same customers
  2. BConglomerate diversification, because clinics are unrelated to insurance
  3. CVertical integration along the chain, moving into a supplier-side stageCorrect
  4. DDivestment, because the insurer is reducing its asset base
  5. Market penetration, because it sells more of the same product

Explanation

Acquiring a stage that supplies services into the insurer's claims process is vertical integration (backward, towards suppliers). Horizontal integration would mean buying a competitor at the same stage. Clinics are related to health insurance, so it is not unrelated diversification.

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