Skip to content

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

In the Indian life insurance industry, a bank-owned distributor accounts for a large share of a mid-sized insurer's new business. The distributor announces it will now give preference to insurers paying higher commission and may launch its own insurance subsidiary. An actuary advising on strategy analyses this within the industry value chain and competitive forces. Which conclusion is most accurate?

The channel has strong bargaining power because it controls customer access, so it can capture margin through higher commission, and its plan to launch an insurer is a credible threat of integration along the chain. Higher commission raises the insurer's cost, so claims that the insurer gains power are wrong.

  1. ADistribution power shifts margin from the insurer to the channel, reflecting strong buyer power and a credible threat of forward integration by the channelCorrect
  2. BThe insurer gains power, because higher commission lowers its distribution cost
  3. CThe threat is only from new entrants, since the bank is not already in the chain
  4. DThe bank's move is a supplier substitute that reduces rivalry in the industry
  5. The change has no effect on the insurer's profit because commissions are regulated

Explanation

A channel controlling access to customers has strong bargaining power over the insurer, and can capture value through commission demands. The threat of the channel entering manufacturing is integration along the chain. Higher commission raises, not lowers, the insurer's cost, and regulatory limits do not remove the power shift entirely.

Did you get it right without looking?

One question tells you little. A timed set on Business and consumer needs, the industry value chain and competitive forces shows your real accuracy, how long you take and where you lose marks.

Practise Business and consumer needs, the industry value chain and competitive forcesFree diagnostic mock

More Business and consumer needs, the industry value chain and competitive forces questions