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

An Indian reinsurer's value chain analysis shows that its cost per unit of risk is lower than rivals' because of centralised modelling and data systems used across all treaty lines. Which type of activity is this centralised modelling and data capability in Porter-style value chain terms, and what does it contribute?

It is a support activity, technology development, which serves several primary activities across treaty lines. By spreading the cost of modelling and data systems over all lines, it lowers unit cost and can create a sustainable cost advantage over rivals.

  1. AA primary activity of outbound logistics that delivers cover to cedants
  2. BA support activity, such as technology development, that can create cost advantage across several primary activitiesCorrect
  3. CA threat of substitutes that reduces industry profitability
  4. DAn exit barrier that keeps the reinsurer in unprofitable lines
  5. A primary activity of after-sales service that raises switching costs

Explanation

Shared modelling and data systems are technology development, a support activity serving many primary activities. Because it spreads across lines, it can lower cost per unit of risk and create cost advantage. It is not a delivery or after-sales activity.

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