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IAI Actuarial Core Principles · Business Management · Strategy, competitive advantage, strategic decision process and PEST analysis

An Indian reinsurer's analyst prepares a PEST analysis and writes: 'Inflation in medical costs is rising (economic). Therefore our claims will rise, so we must increase premiums by 12%.' The reviewing actuary objects. Which objection is most valid in strategic terms?

The objection is that PEST only identifies external influences; it cannot justify a precise 12% premium rise. That figure needs proper pricing analysis, plus consideration of competitors and regulatory limits. Medical inflation is correctly an economic factor, and no rule bans premium changes responding to costs.

  1. APEST identifies external factors only; it does not itself justify a specific premium figure, which needs pricing analysis and consideration of competitors and regulationCorrect
  2. BInflation cannot be classified as an economic factor
  3. CPEST analysis should only be done once every ten years
  4. DPremiums should never respond to external factors
  5. A 12% increase is illegal under Indian law in all cases

Explanation

PEST helps identify and structure external influences, but converting them to a specific action requires quantitative pricing work and other analyses such as competitor and regulatory review. Inflation is correctly economic, there is no fixed ten-year cycle, and the claim of illegality is unfounded.

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