02 - Stakeholders and the social protection system

Question 1

What are the main reasons why individuals save?

Answer 1

Consumption smoothing: Maintaining a consistent pattern of consumption over time, irrespective of income or economic circumstances.

Precautionary saving: Saving to avoid discontinuities in consumption due to sickness, unemployment, or other circumstances.

Bequest motives: Saving to leave something to future generations.

Question 2

Explain how consumption smoothing can be achieved, and contrast the effectiveness of pooling versus saving in different risk scenarios.

Answer 2

Consumption smoothing aims to maintain a consistent level of spending despite fluctuations in income. It can be achieved through saving, which involves accumulating resources to be used during times of need. It can also be achieved through pooling, where individuals share their risks with others. Pooling is more effective when the probability of adverse experience is small and the correlations between the risks occurring to individuals are high. Conversely, when the probability of adverse experience is large, pooling becomes less efficient than saving.

Question 3

What are the main levels of healthcare?

Answer 3

Primary care: First point of consultation, often provided by a general practitioner (GP), family physician, or nurse practitioner. This level includes preventative and chronic disease management.

Secondary care: Services from medical specialists like cardiologists or dermatologists, often requiring a referral from a primary care provider.

Tertiary care: Specialised consultative healthcare, usually on an in-patient basis in a facility with advanced medical investigation and treatment.

Quaternary care: Even more advanced specialist care for rare cases and experimental treatments.

Question 4

What are the main types of healthcare providers?

Answer 4

Doctors

Nurses

Support medical personnel and clinical associates, also known as allied health providers

Hospitals

Upstream service providers, such as pharmaceutical manufacturers, medicine distributors, and suppliers of medical equipment

Question 5

What are the three main types of private hospitals?

Answer 5

Not-for-profit charitable hospitals

Not-for-profit mining hospitals

For-profit hospitals

Question 6

What is “social protection”?

Answer 6

Social protection refers to the policies, programmes, and initiatives designed to support individuals and communities to meet their needs, reducing vulnerability to risks and adverse life events, and includes healthcare and education. It also includes social security which focuses on benefits relating to unemployment, disability, old age, and other circumstances that lead to loss of income or economic hardship.

Question 7

What are the criteria for evaluating social protection systems?

Answer 7

Adequacy: Do benefit systems prevent poverty and ensure reliable lifetime consumption smoothing?

Affordability: Are the systems within society’s or individuals’ financing capacity?

Sustainability: Can the systems remain financially healthy for a reasonable time period?

Robustness: Are the systems capable of withstanding major economic, demographic, and political shocks?

Question 8

What are the main funding components for retirement?

Answer 8

Transfers from the public sector, funded by taxes

Transfers from family members, charities, or religious organizations

Investment income from capital ownership, such as interest, rental income, or dividends

Question 9

Why do people generally stop or reduce their work as they get older, and how does this affect their retirement planning?

Answer 9

People stop or reduce work due to a mix of “push” and “pull” factors. “Push” factors include declining physical health, loss of employment opportunities, and job dissatisfaction. “Pull” factors include having sufficient resources for retirement, wanting to pursue leisure activities, and facing mandatory retirement ages. This shift necessitates careful retirement planning to ensure income streams for covering consumption and healthcare needs without regular wages.

Question 10

What are some examples of behavioral biases that may affect financial decision-making?

Answer 10

Myopia: Choosing a higher level annuity with a lower long-term benefit when faced with the choice between an inflation-linked or level annuity.

Loss aversion: Being overly conservative to avoid short-term losses at the expense of expected long-term outperformance.

Sunk cost fallacy: Reluctance to cut losses by changing jobs or switching out of a loss-making investment.

Hyperbolic discounting: Putting off saving for retirement because subjective discount rates make future savings less valuable.

Availability heuristic: Basing decisions on recent events and media stories rather than actual savings levels.

Hindsight bias: Believing that investment choices were better than they actually were.

Framing: The way in which options are presented affecting the choices that are made.

Complexity avoidance: The more fund choices are offered, the less likely people are to participate in any fund at all.

Inertia: People never change investment allocations or contribution rates.

Question 11

Explain the difference between social assistance and social insurance, providing examples of each. Discuss the funding mechanism for each and consider why social insurance may be preferable.

Answer 11

Social assistance is non-contributory and funded by general taxation, aiming to provide a minimum level of support. An example is the old age grant.

Social insurance is contributory, with benefits linked to individual contributions, often based on a percentage of salary. An example is a state-operated retirement fund.

Social insurance may be preferable as it avoids some of the behavioral biases such as inertia and is linked to individual contributions.

Question 12

Analyze the potential conflicts of interest between the various stakeholders in a benefit arrangement. Consider the roles of trustees and how they are appointed.

Answer 12

Conflicts can arise between different stakeholders in benefit arrangements.

Sponsor-appointed trustees may act in the interest of the sponsor, not the members of a fund.

Member-elected trustees may create unsustainable scheme demands, even if these are contrary to the interests of the members.

Trustees often have strong legal obligations to members and are required to act in their best interest.

A balance between sponsor-appointed and member-elected trustees is often beneficial to create a balance of interests.

Question 13

Describe the different models of healthcare provision in the public and private sectors, discussing the potential advantages and disadvantages of each and give examples of each.

Answer 13

The public sector is generally administered by the government and may be heavily subsidized or free at the point of service. Public healthcare may be associated with long queues, prescribed treatment protocols and limited alternatives.

The private sector is provided by private institutions or practitioners. It allows for greater choice of providers, and can alleviate pressure on the overburdened public sector. Private healthcare may be more expensive than the public alternative.

Examples of private hospitals are not-for-profit, faith-based hospitals, and for-profit hospitals.

Question 14

Outline the key differences in the distribution channels of insurance products when marketing to individuals versus large employer groups.

Answer 14

Distribution channels for individuals include insurance brokers, tied agents, an insurer’s own salesforce, and direct marketing methods (such as via mailshots, telemarketing, comparison websites, and workplace marketing).

Distribution channels for large employer groups are more likely to involve specialist financial advisors or brokers.

Group arrangements may arise when an employer or fund purchases cover for employees or members.

Question 15

What are the different ‘pillars’ (or tiers) of social security systems as categorized by the World Bank and International Labor Organization (ILO)?

Answer 15

The World Bank and ILO divide social security systems into several pillars:

Pillar 0 / Tier 1: Social Assistance: Non-contributory, state-funded programs aimed at poverty alleviation (e.g., old age grants), which are typically means-tested.

Pillar 1 / Tier 2: Social Insurance: Mandatory, contributory programs funded by contributions and often linked to individual contribution levels or salaries (e.g., state pension schemes).

Pillar 2 / Tier 3: Occupational Benefits: Mandatory or voluntary, employer-sponsored schemes, often privately managed (e.g., company pension funds).

Pillar 3 / Tier 4: Voluntary Benefits: Flexible and tailored for individual needs and can be private or market-based products.

Pillar 4: Non-Financial Benefits: Informal supports such as family and community care and home ownership.

These pillars represent the ways in which social protections are funded and delivered.

Question 16

What is the role of Managed Care Organizations (MCOs)? What are some of the reasons for cost increases in healthcare, and how do MCOs attempt to mitigate these costs?

Answer 16

MCOs are for-profit entities that use clinical and financial techniques to manage risk, reduce cost, and improve quality in healthcare.

Healthcare cost increases can be driven by factors like a misalignment of incentives between the provider and the payer, medical technology advancements, an aging population, and fraud.

MCOs attempt to mitigate these costs through such measures as encouraging cost-effective, high-quality care.

Question 17

Describe the concept of bancassurance and explain why a bank might be a better distribution channel than a hospital for an insurance product.

Answer 17

Bancassurance is when a bank sells insurance products through its branches and mailshots.

Banks can have an established relationship with customers and detailed personal and financial information, which can be used to target marketing efforts.

Insurance is an intangible product, therefore a customer who already has a relationship with a bank may be more likely to trust the bank’s recommendation than a hospital.

Question 18

Explain the concept of “worksite” or “workplace” marketing and how this method of distribution differs from typical employer-sponsored group insurance.

Answer 18

In worksite marketing, a broker or insurer gets permission to address the entire workforce of a company to sell individual insurance products.

While the employer is involved in the marketing process, individuals will have individual contracts with the insurance company.

In typical employer-sponsored group insurance, the employer purchases a single policy to cover all employees. The employer is the policyholder, and the employees are covered by the policy while they remain employed.