2. External Environment Flashcards
Name the 2 types of compulsory insurance legislation in the UK
- 3rd party liability car insurance
- Employer liability insurance
Explain the following statement: ‘Regulation leads to information asymmetry which puts responsibility on providers to demonstrate consumer understanding’
Regulation will influence the type of product most suited to a customer so terms must be suitably explained to customers. This often means more complex products aren’t marketed
What benefit should be considered when an individual is financially planning?
State benefits
State benefits allow individuals to provide less for themselves. Give 2 examples
- Free healthcare reduces the need for health insurance
- State pension reduces the private pension benefit required
Give an example where state benefits reduce savings incentive
Low income individuals may not save if it results in a lower level of benefits
What is often not allowed for in financial planning regarding state benefits?
Changes to state benefits
Give an example of state benefits that can be found in the study notes
Singapore’s Central Provident Fund 1955 which provided security for retirement & those unable to work
Name the 4 types of tax that can be applied to benefits
- tax-free
- income tax
- hybrid
- excess of benefits over-and-above contributions taxed as income
What’s return accumulation of tax?
Where the gains of a financial product itself is taxed to avoid being double-taxed
How may one insure against income tax?
An endowment to cover the tax bill
Name 2 financial products which have some tax benefit?
- ISA
- Tax-free government savings vessels
- Pension provisions
What’s a wrapper in the context of accounting standards?
A method of bringing a product to market where it’s wrapped up as another
How can accounting standards influence the design of contracts?
The way benefit schemes are reported in company accounts influences the type of benefit they’ll offer
What is Capital Adequency?
The excess of assets over the sum of liabilities & capital requirements
What is corporate governance?
The high-level framework within which a firm’s decisions are made
What is Solvency II?
A risk-based measure of capital adequacy in the UK
What does pillar 2 of Solvency II say?
Firms are required to hold minimum standards in the quality of their risk management
How are management of firms incentivised to act in stakeholder interests?
Remuneration or financial compensation
Why are non-executives essential to corporate governance? (LIP)
- Leading role in audit committee
- Impartial view
- Play a role in setting remuneration for directors
What is a mutual society?
An organisation founded by an altruistic gesture, lending capital with no requirement of repayment
Who do the profits of a mutual society belong to?
Internal shareholders
Why should a mutual society be able to provide better value benefits for its members?
No funds are diverted to shareholders through dividends
What’s the main drawback of a mutual society?
Capital can’t be easily generated from capital markets
What are the 2 types of propriety firm?
Public & private
What’s the benefit of a public proprietary over a private one?
Better access to capital markets for finance
Is a public or private proprietary firm more likely to benefit from economics of scale?
Public
What’s the benefit of a private proprietary over a public one?
Benefit from closer involvement of owners who may have significant capital to inject
What’s the main drawback of a private proprietorship?
May be as limited as a mutual society for raising capital
What are the 5 steps in the underwriting cycle?
- Profitable business attracts insurers to market
- Premium rate drops
- Profits fall
- Insurers leave the market
- Premium rates drop
What is the key concept underlying the business cycle?
High interest rates drive higher demand for saving
Give an example of a cultural/social change in culture which switches the demand for a financial product
Increased environment awareness reduces investment in the coal/natural gas sector
Name the 4 main external issue groups which impact financial benefit products (CDFT)
- Cultural/Social trends
- Demographic changes
- Lifestyle considerations
- Technological advancements
Give 2 examples of a demographic change which switches the demand for a financial product
- Increase in life expectancy increases
proportion of population which are older increases saving which lowers interest rates - Mass migration from areas of high flood risk due to climate change
What is lifestyling?
The gradual move from risky investments to more safe ones with age
Give an example of a lifestyle consideration which switches the demand for a financial product
A young population has more demand for loans
Give 2 examples of a technological change which switches the demand for a financial product
- Improved healthcare has changed the nature of health insurance
- Banking services moving online has reduced costs for banks
How have price comparison sites changed the environment for financial product providers?
Improved information symmetry has reduced the need for intermediaries who sell financial products
