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IAI Actuarial Core Principles · Business Economics · Importance of international trade

An Indian insurer's cost base includes imported reinsurance-related software and hardware. The government raises import duties broadly on electronic equipment to protect domestic manufacturers. Which is the most likely effect on the insurer?

The insurer will most likely face higher input costs and weaker competitiveness, because import duties raise the price of imported equipment it uses. Protecting upstream domestic producers effectively taxes downstream firms, and shielded suppliers have little pressure to cut prices.

  1. ALower costs because domestic manufacturers cut prices at once
  2. BHigher input costs and reduced competitiveness against foreign rivalsCorrect
  3. CNo effect because insurers do not use traded goods
  4. DImproved balance of payments for the insurer through lower imports
  5. A fall in the rupee value of its liabilities

Explanation

Duties raise the rupee price of imported equipment, which is an input cost for the insurer. Protection of upstream producers therefore penalises downstream users, reducing their competitiveness. Domestic suppliers shielded from competition have little incentive to cut prices.

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