2. External Environment

Question 1

Name the 2 types of compulsory insurance legislation in the UK

Answer 1

• 3rd party liability car insurance
• Employer liability insurance

Question 2

Explain the following statement: ‘Regulation leads to information asymmetry which puts responsibility on providers to demonstrate consumer understanding’

Answer 2

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

Question 3

What benefit should be considered when an individual is financially planning?

Answer 3

State benefits

Question 4

State benefits allow individuals to provide less for themselves. Give 2 examples

Answer 4

• Free healthcare reduces the need for health insurance
• State pension reduces the private pension benefit required

Question 5

Give an example where state benefits reduce savings incentive

Answer 5

Low income individuals may not save if it results in a lower level of benefits

Question 6

What is often not allowed for in financial planning regarding state benefits?

Answer 6

Changes to state benefits

Question 7

Give an example of state benefits that can be found in the study notes

Answer 7

Singapore’s Central Provident Fund 1955 which provided security for retirement & those unable to work

Question 8

Name the 4 types of tax that can be applied to benefits

Answer 8

• tax-free
• income tax
• hybrid
• excess of benefits over-and-above contributions taxed as income

Question 9

What’s return accumulation of tax?

Answer 9

Where the gains of a financial product itself is taxed to avoid being double-taxed

Question 10

How may one insure against income tax?

Answer 10

An endowment to cover the tax bill

Question 11

Name 2 financial products which have some tax benefit?

Answer 11

• ISA
• Tax-free government savings vessels
• Pension provisions

Question 12

What’s a wrapper in the context of accounting standards?

Answer 12

A method of bringing a product to market where it’s wrapped up as another

Question 13

How can accounting standards influence the design of contracts?

Answer 13

The way benefit schemes are reported in company accounts influences the type of benefit they’ll offer

Question 14

What is Capital Adequency?

Answer 14

The excess of assets over the sum of liabilities & capital requirements

Question 15

What is corporate governance?

Answer 15

The high-level framework within which a firm’s decisions are made

Question 16

What is Solvency II?

Answer 16

A risk-based measure of capital adequacy in the UK

Question 17

What does pillar 2 of Solvency II say?

Answer 17

Firms are required to hold minimum standards in the quality of their risk management

Question 18

How are management of firms incentivised to act in stakeholder interests?

Answer 18

Remuneration or financial compensation

Question 19

Why are non-executives essential to corporate governance? (LIP)

Answer 19

• Leading role in audit committee
• Impartial view
• Play a role in setting remuneration for directors

Question 20

What is a mutual society?

Answer 20

An organisation founded by an altruistic gesture, lending capital with no requirement of repayment

Question 21

Who do the profits of a mutual society belong to?

Answer 21

Internal shareholders

Question 22

Why should a mutual society be able to provide better value benefits for its members?

Answer 22

No funds are diverted to shareholders through dividends

Question 23

What’s the main drawback of a mutual society?

Answer 23

Capital can’t be easily generated from capital markets

Question 24

What are the 2 types of propriety firm?

Answer 24

Public & private

Question 25

What’s the benefit of a public proprietary over a private one?

Answer 25

Better access to capital markets for finance

Question 26

Is a public or private proprietary firm more likely to benefit from economics of scale?

Answer 26

Public

Question 27

What’s the benefit of a private proprietary over a public one?

Answer 27

Benefit from closer involvement of owners who may have significant capital to inject

Question 28

What’s the main drawback of a private proprietorship?

Answer 28

May be as limited as a mutual society for raising capital

Question 29

What are the 5 steps in the underwriting cycle?

Answer 29

1. Profitable business attracts insurers to market
2. Premium rate drops
3. Profits fall
4. Insurers leave the market
5. Premium rates drop

Question 30

What is the key concept underlying the business cycle?

Answer 30

High interest rates drive higher demand for saving

Question 31

Give an example of a cultural/social change in culture which switches the demand for a financial product

Answer 31

Increased environment awareness reduces investment in the coal/natural gas sector

Question 32

Name the 4 main external issue groups which impact financial benefit products (CDFT)

Answer 32

1. Cultural/Social trends
2. Demographic changes
3. Lifestyle considerations
4. Technological advancements

Question 33

Give 2 examples of a demographic change which switches the demand for a financial product

Answer 33

• 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

Question 34

What is lifestyling?

Answer 34

The gradual move from risky investments to more safe ones with age

Question 35

Give an example of a lifestyle consideration which switches the demand for a financial product

Answer 35

A young population has more demand for loans

Question 36

Give 2 examples of a technological change which switches the demand for a financial product

Answer 36

• Improved healthcare has changed the nature of health insurance
• Banking services moving online has reduced costs for banks

Question 37

How have price comparison sites changed the environment for financial product providers?

Answer 37

Improved information symmetry has reduced the need for intermediaries who sell financial products