Casualty Actuarial Society (CAS) Practice Exam

How might an insurer follow a cost leadership approach despite regulatory constraints?

1. By increasing membership fees

2. By lowering commissions for producers

3. By expanding service coverage

4. By hiring more personnel

The correct answer is: By lowering commissions for producers

A cost leadership approach involves an insurer striving to become the lowest-cost provider in the market in order to attract price-sensitive customers. Lowering commissions for producers is an effective way to reduce overall expenses. Commissions represent a significant cost for insurers, and by negotiating lower rates with agents or reducing the percentage paid, the insurer can maintain competitive pricing for their insurance products while also preserving its profit margins. This strategy aligns with the cost leadership model because it helps the insurer manage its costs without significantly impacting its core operations or product quality. The other options, while they may have their merits in certain business strategies, do not directly contribute to a cost leadership approach under regulatory constraints. Increasing membership fees could risk losing customers to competitors, thereby undermining the cost leadership goal. Expanding service coverage generally necessitates additional expenses, which could contradict the focus on minimizing costs. Hiring more personnel typically increases operational costs rather than reduces them, making it challenging to adhere to a cost leadership strategy. Thus, lowering commissions stands out as a prudent method to align with the principles of cost leadership while navigating regulatory limitations.