2. External environment Flashcards
What factors should be considered in relation to the external environment?
CREATE GRAND LISTS
- Corporate structure
- Regulation and legislation
- Environmental issues and climate change
- Accounting standards
- Tax
- Economic outlook (e.g. interest rates, inflation, growth and exchange rates)
- Governance
- Risk management requirements
- Adequacy of capital and solvency
- New business environment
- Demographic trends
- Lifestyle considerations
- International practice
- State benefits
- Technology
- Social and cultural trends
Describe the underwiting cycle
- Profitability in different insurance classes tends to go in cycles driven by demand and supply and actual claims experiences and economic climate
- When business is profitable, more insurers enter the market.
- Premium rates reduce as insurers compete for market share
- This leads to reduced profits, loss of business and reduced solvency and the cycle goes into depression
- The position can be accelerated by catastrophes
- Insurers leave that market
- Premium rates increase to cover the losses
Which two key factors drive the business cycle for banks
- Variations in interest rates
- Economic activity
Which two forms of general insurance cover are compulsory in many countries?
- Employers’ liability
- Motor third party liability
How might regulation ensure that a customer enters into a contract that is suitable to their financial needs?
2
- Limits on the charges levied by the provider, eg on unit trusts or unit linked contracts
- Regulation on the sale process, eg on advice given and disclosure of information
How might accounting standards affect employer benefit provision and the financial products brought to the market?
- The way benefits schemes need to be reported in company accounts may affect the type of benefits that employers are prepared to offer their employees
- Presentation of financial instruments in the accounts of product providers=> the range of products brought to the markets
- E.g. Different Acc requirements for=> setting provisions=> influences design of contracts in various territories
- Similalry, fund manager invests in an insurance wrapper or through a collective investment scheme=> depend on the presentation and results shown in a company’s accounts
List four examples of how benefits arising from financial products and schemes taxed?
- Benefits can be received free of tax
- Excess of benefits over contributions=> taxed as income or capital gains tax
- Benefits=> taxed entirely as income
- A portion of the benefit can be tax-free, with the balance being taxed ➢ Normal or special tax rates can be used
How are items other than benefits taxed?
- Some arrangements=> tax relief on contributions- coupled with tax on resulting benefits
- OR contributions may be paid from taxed income- tax relief on the resulting benefits
- Income+ gains may be taxed during the accumulation phase=> No tax on the policyholder’s gain
- Tax payble=> inheritance
- Insurance may be able to cover this tax liability
What is corporate governance and what are the features of a good corporate governance framework?
- High level framework within which a company’s managerial decisions are made.
- A good corporate governance framework=>
- Encourages managers to act in the best interest of stakeholders rather than in their own personal interest
- Incentivises manages to achieve the first aim
- Utilises non-executive directors
What is the broad approach of banking and insurance regulation to ensuring the capital adequacy and solvency of a provider?
- Regulation=> Framework on how financial institutions measure their capital adequacy and solvency
- Financial institutions needs to determine the minimum capital that they are required to hold. Capital adequacy is measured as the excess of assets over the sum of liabilities and capital requirements.
- Might be expressed as a monetary amount.
- Or might be expressed as a percentage of liabilities and capital requirements
- Or a multiple of the capital requirements
- Availability of computing power=> Risk based capital requirement
- Rather than simple formulae based approached=> outdated
How does age affect lifestyle considerations when it comes to the need for financial products?
- Young people demand=> loans and mortgages
- Few demand savings
- Slightly older people=> pay their loans and start to save
- And require protection for dependents
- Longer working lifetimes and increases in life expectancy will increase the need for savings products, life assurances and the age to which it will be required.
- Move away from volatility more towards security prior to retirement.
- Older (still in retirement)=> demand for savings diminishes, but is replaced with demand for post-retirement income plans and long term care products
- Children become less dependent
Give four examples of how climate change may influence population demographics
- Mass migration from areas at high risk of flooding and rising sea levels
- Increased morbidity and mortality
- In some areas, increased risk of disease
- Increased conflicts and wars
Give two ways in which changing trends in urbanisation, land use and globalisation may increase the impacts of climate change
- Unplanned urbanisation leading to overcrowding, water shortages, poor sanitation and diseases
- Most major cities on coatlines are susceptible to weather-related events and rising sea levels
Give two ways in which changing trends in urbanisation, land use and globalisation may reduce the impacts of climate change
- Building of smart cities, reducing greenhouse gas emissions and mitigating the effects of climate change e.g. through flood defences
- Afforestation (planting of trees), removing greenhouse gases from atmosphere
What are the effects of an ageing population on the economy or state (demographic changes)?
- Older people=> save more spend less=> lower interest rates and deflationary pressure on the economy
- Some pay-as-you-go state pensions systems are becoming unsustainable=> as income received from the working pop falls short of that needed to pay retired population.
- Increasing cost of healthcare=> increased taxes or reduced healthcare provided for by the state
- Cost per capita of educating the population will fall
What are the key features of mutual and proprietary financial providers?
- 1.Mutuals=> no shareholders
- Better benefits as profits=> belong entirely to with-profits policyholders
- Restricted access to capital restricts product offerings
- Specific distribution of profits made or contracts priced at cost
- 2.Proprietary=> Shareholders
- Public proprietary companies => easier access to capital, possible benefits from economie of scale and more dynamic management
- Private proprietary companies => restricted access to capital, possible benefits from close involvement of owners
- Profits may be shared with shareholders and with profit policyholders
What are examples of changing social and cultural trends that could have an impact on financial products, schemes, contracts, and transactions available?
6
- Increase home ownership=> increases demand for mortgages
- Cuts in state healthcare=> demand for medical aid
- Increasing prosperity=> demand for savings products
- Increased telematics=> allow the risk factors for the individual monitored
- increased awareness by consumers of environmental and ethical issues => increase demand from sustainable providers
- Greater ‘Social inflation’ => increase cost of claims driven by higher court awards
What are examples of technological advances that can have an impact on the availability of financial products, schemes, contracts and transactions?
7
- Internet quotations and sales
- Price comparison websites
- Banking over the internet and telephone
- Insurance companies using website to capture customer enquiries and register claims
- Social media for advertising and links to sales/ enquiry websites
- Email as fully accepted and widely used means of communication
How can state benefits influence an individual’s needs for benefits?
4
- State benefits=> minimum standard of living=> supplement this with benefits such as => employer sponsored benefit scheme, insurance medical aid
- State benefits can remove the need for individual provision=> public health care, state pension.
- State benefits disincentive to save=> means tested benefits
- If state compels individuals to save=> reduce the amount individuals are prepared to save voluntary in individual arrangements
