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

Kaveri General Insurance offers a low-priced motor policy online, with no agents and minimal add-ons, aimed at all private car owners across India. Its profitability depends on handling very large volumes at a lower unit expense than any rival. Which statement best describes the strategic risk of this approach?

The main risk is that cost leadership depends on a single advantage, being the lowest-cost producer. A rival with a lower cost base can undercut or match its price, eroding the advantage, while buyers remain price sensitive and new entrants are not permanently deterred.

  1. AIt cannot work because insurance is a regulated product
  2. BRivals may match the price and a competitor with a lower cost base can undercut it, eroding its sole source of advantageCorrect
  3. CIt will necessarily lead to differentiation by brand
  4. DIt reduces the bargaining power of every buyer to zero
  5. It removes the threat of new entrants permanently

Explanation

A broad cost-leadership strategy rests on one source of advantage, being the lowest-cost producer. If a rival achieves lower costs or matches price, the advantage disappears. Price-sensitive buyers retain bargaining power, and entry threats remain.

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