12. The general business environment II Flashcards
1
Q
What are overheads
A
- Any expenses not specifically related to a particular policy activity.
- “Fixed” expenses that don’t vary with volume of business within given scale of company operation.
2
Q
What are the types of expenses incurred by the company
A
- Commission
- Management expenses:
- Initial
- Renewal
- Terminal
- Overheads
3
Q
What risks might arise in respect of expenses?
A
- Profitability risk- risk that expense loadings in premiums aren’t enough to meet actual costs.
- Risk of rising inflation leading to company being unable to contain expenses
4
Q
What is the effect of inflation on expenses?
A
- Many expenses linked to earnings or price inflation
- Affects underlying costs»_space; affects level of expenses allocated to policies
- Can use indices to make assumptions about future inflation rates
5
Q
Effect of economic cycles on expenses
A
- Business volumes may fluctuate in line with business cycles…
- … initial, renewal and claim expenses could follow pattern of volatility
6
Q
What factors in the economic market are drivers of uncertainty and risk for business?
A
- Available assets
- Volatility of investment markets
7
Q
How do the assets available affect the business?
A
- Influence investment policy
- Interest rate assumptions used in pricing
8
Q
How does the volatility of the investment market affect the business?
A
- More volatile investment markets will have higher capital requirements»_space;
» increase cost of capital»_space; increase price - Expensive prices may affect demand for produxts
- Insurer investing in risky markets likely to have higher expected return»_space;
» increased chance of required return not being met»_space; increase risk discount rate when discounting profits»_space; increase cost of capital
9
Q
What risks is the company exposed to from a legal standpoint?
A
- A principle related to PRE being unfavourable for the compant
- e.g. constrained discretion in declaring different bonuses across policies - Unfair contract terms make clauses of the contract void
- e.g. if company reserves right to increase unit linked charges by fixed rate each year and it’s considered unfair in the country. This clause might be void - Changes in the legal environment which are restrospective, changing legal contract between ph and insurer
- Inconsistencies between policy document and information portrayed to ph
10
Q
How can the regulatory regime affect the business?
A
- Impose restrictions on life companies with aim to protect ph.
- Wider regulation on sales media may impact life companies and products sold
- Restrictions restricting innovation or reducing benefits that ph could have gotten
- Affect contract design as companies will want to use regulatory opportunities
11
Q
Common regulatory restrictions on life companies
A
- Restriction on types of contract a life company can offer.
- Restriction on premium rates, or charges, for some types of contract.
- Requirements relating to terms and conditions of contracts, for example how paid-up policy and surrender values are calculated
- Restrictions on channels through which life insurance can be sold, on sales procedures or on information given at point of sale.
- Restrictions on ability to underwrite (e.g. to avoid discrimination)
- An indirect constraint on amount of business that may be written, via minimum reserving or solvency margin requirements.
- Restrictions on types of assets or amount of any particular asset in which the life company may invest for the purpose of demonstrating solvency.
12
Q
What regulatory restrictions might be applied in terms of investments?
A
- Types of assets that can be invested into
- Amount of any type of asset that can be accounted for for purpose of demonstrating solvency
- Extent to which mismatching is allowed
13
Q
How might the fiscal regime affect the business?
A
- Tax approaches on life companies
- Different tax treatment of different types of life contracts can make it cheaper to provide some benefits as one form of business than another
- Different tax treatment of life business and other forms of saving may create opportunities for insurer, but also restrict product design
14
Q
Common approaches to life insurance company taxation
A
- Tax on annual profits of business, where broadly profits are excess of the change in assets over the change in liabilities
- Tax payable on investment income less some or all of the operating expenses of the company
- May be tax on premium income
15
Q
Considerations when comparing tax advantages
A
- Tax treatment of premiums, particularly if they’re deductible from individual’s taxable income in full, in part or not at all and whether there is a premium tax.
- Taxation of life insurer’s fund during life of contract
- Taxation of eventual policy benefits
