Strategic Planning and Decision Making Flashcards

Which of the following is a key limitation of using Net Present Value (NPV) alone as a strategic decision-making tool for insurance investments?

Answer: NPV does not account for the flexibility to adapt decisions as uncertainties resolve

NPV is a static method that does not capture the value of managerial flexibility (real options), such as the ability to expand, delay, or abandon a project.

A P&C insurer's board is reviewing a proposal to acquire a smaller specialty insurer. Which of the following is the most critical strategic due diligence consideration?

Answer: Cultural fit and reserve adequacy of the target's book of business

Reserve adequacy directly impacts post-acquisition financial performance, while cultural fit determines integration success—both are critical M&A strategic risks.

In strategic planning for insurance, a 'harvest' strategy applied to a mature, declining line of business implies:

Answer: Maximizing short-term cash flow while allowing market share to decline

A harvest strategy extracts maximum cash flow from a declining business unit by reducing investment while accepting loss of market position.

Under the GE-McKinsey Matrix, a business unit with high industry attractiveness but low competitive strength would most likely be recommended for:

Answer: Selective investment or hold

When industry attractiveness is high but competitive position is weak, the matrix recommends selective investment to improve position or hold until conditions change.

Which of the following cognitive biases is most likely to affect reserve setting decisions in a strategic planning context?

Answer: Anchoring bias causing initial reserve estimates to unduly influence final selections

Anchoring bias occurs when decision makers rely too heavily on the first piece of information (the initial reserve estimate), making subsequent adjustments insufficient.

An insurer uses a hurdle rate of 12% for evaluating new business investments. A proposed IT modernization project yields an IRR of 10%. The strategic implication is:

Answer: The project destroys shareholder value and should be rejected unless strategic benefits justify the shortfall

When IRR falls below the hurdle rate, the project does not generate sufficient returns to cover the cost of capital, destroying value unless non-financial strategic benefits justify it.

Which of the following best describes the difference between strategic risk and operational risk in a P&C insurer?

Answer: Strategic risk arises from major decisions and external changes affecting viability; operational risk arises from internal process failures

Strategic risk stems from high-level choices (e.g., market positioning, M&A) and environmental shifts, while operational risk stems from failures in day-to-day processes and systems.