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

An Indian reinsurer relies on two global retrocessionaires for most of its capacity, and switching to another provider would require lengthy renegotiation and re-modelling. In a five forces review, what does this situation indicate and what response would best reduce the exposure?

The situation shows strong supplier power, since there are few providers and switching is costly. The sensible response is to diversify capacity providers or develop alternatives, which reduces dependence and improves bargaining strength. Increasing reliance or ignoring alternatives would leave the reinsurer more exposed.

  1. AStrong supplier power; diversify capacity providers or build alternative arrangementsCorrect
  2. BWeak supplier power; increase dependence on the two providers further
  3. CStrong buyer power; raise premiums to policyholders immediately
  4. DLow threat of substitutes; stop reviewing alternatives
  5. High rivalry; merge with the two retrocessionaires without regulatory approval

Explanation

Few suppliers and high switching costs give the suppliers strong bargaining power over the reinsurer. Diversifying providers reduces dependence and improves its negotiating position. Deepening dependence or ignoring alternatives would worsen the exposure, and merging without approval is improper.

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