CAS Strategic Planning and Decision Making 3 — Questions and Answers
Question 1: Which concept in strategic management refers to activities that create value for customers and cannot be easily imitated by competitors?
- Economies of scale
- Core competencies (Correct answer)
- Market segmentation
- Operational leverage
Correct answer: Core competencies
Core competencies, as defined by Prahalad and Hamel, are distinctive capabilities that provide competitive advantage and are difficult for rivals to replicate.
Question 2: In enterprise risk management (ERM), the concept of 'risk appetite' is best described as:
- The maximum loss an insurer can absorb before insolvency
- The aggregate level of risk an organization is willing to accept in pursuit of its objectives (Correct answer)
- The regulatory capital required to cover worst-case losses
- The retention limit set in a reinsurance treaty
Correct answer: The aggregate level of risk an organization is willing to accept in pursuit of its objectives
Risk appetite is a strategic-level declaration of how much risk an organization will accept while pursuing its goals, distinct from risk capacity or tolerance.
Question 3: Porter's generic strategies suggest that an insurer competing primarily on price in personal auto would be following which strategy?
- Differentiation
- Cost Leadership (Correct answer)
- Focus-Differentiation
- Market Development
Correct answer: Cost Leadership
Cost Leadership involves achieving the lowest cost structure in the industry to offer competitive pricing, which is the basis for price-driven competition.
Question 4: In strategic decision-making, 'satisficing' refers to:
- Maximizing expected utility across all available options
- Choosing an option that meets a minimum threshold of acceptability (Correct answer)
- Deferring a decision until full information is available
- Optimizing outcomes using linear programming
Correct answer: Choosing an option that meets a minimum threshold of acceptability
Satisficing, introduced by Herbert Simon, describes selecting the first option that is 'good enough,' reflecting bounded rationality in real-world decisions.
Question 5: A reinsurance company is evaluating whether to expand its catastrophe reinsurance capacity. The primary strategic risk consideration is:
- The creditworthiness of cedents
- Volatility and correlation of catastrophe losses with the overall portfolio (Correct answer)
- The timing of premium collection
- Commission rates offered to brokers
Correct answer: Volatility and correlation of catastrophe losses with the overall portfolio
Expanding catastrophe reinsurance capacity introduces significant loss volatility and potential correlation risks that can destabilize the overall portfolio's risk-return profile.
Question 6: Which of the following best describes a 'lagging indicator' in the context of an insurance company's strategic performance measurement?
- Policy renewal rates measured monthly
- Employee training hours completed
- Combined ratio reported for the prior year (Correct answer)
- Customer satisfaction scores collected quarterly
Correct answer: Combined ratio reported for the prior year
A lagging indicator measures past performance outcomes; the combined ratio for a prior period reflects results already achieved and cannot be adjusted in real time.
Question 7: In the context of strategic planning, 'blue ocean strategy' would encourage a P&C insurer to:
- Aggressively compete for market share in commercial auto
- Create uncontested market space by offering a fundamentally new product or service (Correct answer)
- Undercut competitors on premium rates for standard lines
- Replicate best practices from the industry leader
Correct answer: Create uncontested market space by offering a fundamentally new product or service
Blue ocean strategy, by Kim and Mauborgne, focuses on creating new demand in uncontested market space rather than competing in existing 'red ocean' markets.
CAS Strategic Planning and Decision Making 3
Which concept in strategic management refers to activities that create value for customers and cannot be easily imitated by competitors?