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IAI Actuarial Core Principles · Business Economics · Relationship between economics and business

Herbert Simon argued that many firms 'satisfice' rather than maximise. Which behaviour best illustrates satisficing by a Bengaluru general insurer?

Satisficing means accepting a good-enough outcome, such as a target return, and not continuing to search for the best possible one. It reflects bounded rationality and limited information, in contrast to the optimising behaviour assumed in profit maximisation.

  1. ASetting prices exactly where marginal revenue equals marginal cost
  2. BAccepting any underwriting profit that meets a target return and ceasing to search for better optionsCorrect
  3. CExpanding until market share reaches 100%
  4. DCutting premiums to zero to deter entrants
  5. Calculating the exact optimal reserve using full information

Explanation

Satisficing means settling for an adequate, target-meeting outcome because information and decision-making capacity are limited, rather than seeking the optimum. Setting MR = MC or computing exact optima with full information is maximising behaviour.

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