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CP1 Flashcards > 2 - External Environment + Rayno's for completion > Flashcards

2 - External Environment + Rayno's for completion Flashcards

1
Q

How do the external environment factors affect the actuarial control cycle?

A

Think about how the external environment factors affect:

  • The work that actuaries perform
  • Insurance company behaviour both commercial and as employers
  • Product design
  • Volume of sales
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2
Q

Components of the External Environment

A
  • Laws and Regulatory environment
  • Govt. and Judicial environment
  • Climate and natural perils
  • Economic and social environment
  • Industry and business environment
  • Physical environment
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3
Q

Laws & Regulatory environment considerations:

A

Affects:

  • Terms & conditions in insurance contracts
  • Sales of financial products (price control, compulsory insurance)
  • Certain insurance is compulsory
  • Product design e.g. some covers cannot have upper limit like employer’s/product/public liability
  • Conduct of business at the point of sale & while business is still active
  • Solvency/ Liquidity requirements
  • Financial reporting standards
  • Competition
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4
Q

Govt. and Judicial environment considerations:

A
  • Judicial decisions & precedents
  • Government policy
  • Taxation (affects govt ability to implement govt. policy)
  • Affects product range offered (due to state benefits)
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5
Q

Physical environment:

Climate & natural perils considerations

A
  • Catastrophes can cause large claims, might need to update case estimates for catastrophe models
  • Insurance charges will be higher in areas prone to disasters
  • It may be difficult to obtain cover in certain areas, govt. might step in to assist
  • Reinsurance might be very expensive after a catastrophe (burning cost) or it might not be available
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6
Q

Economic & social environment considerations:

A
  • Economic conditions and trends
  • Demographic structure and trends
  • Work & employment patterns
  • Social factors & trends
  • Industrial & labour union issues
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7
Q

Demographic structure & trends considerations:

A
  • These affect demographic assumptions
  • Increased longevity + reduced birth rate => ageing
    population
  • Employment trends
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8
Q

Industry and business environment considerations: (14)

A

CORPORATE FUNCTION

  • Industry associations
  • Corporate culture
  • Organizational structure
  • Accounting standards & practices

PRODUCTS

  • Accounting standards & practices
  • Affects range of products/services offered
  • Affects product distribution channels
  • Expenses/profitability of products

MARKET & THE REST OF THE WORLD
- Underwriting cycle
- Competition
- Price sensitivity e.g. in recessions, highly
elastic prices
- Needs of consumers and businesses
- Availability of reinsurance (might not be available/very expensive following catastrophes)
- Globalization
- Convergence of financial institutions (variety of services from one type of fin. institution)

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9
Q

Govt. and Judicial environment:

Judicial decisions & precedents

A
  • > Affects interpretation of legislation
  • > Interpretation of insurance policy wording
  • > Could increase amount of claims for liability products if judicial decisions go against insurer
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10
Q

Govt. and Judicial environment:

Competition vs Barriers to entry

A
  • Barriers to entry
    - > Ensures that only strong companies operate
    - > Treat customers fairly and provide best services
    - > Greater security of benefits and products
  • Competition
    - > Potentially better/cheaper products
    - > More product innovation
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11
Q

Govt. and Judicial environment:

Taxation

A

-> Impacts running of financial services institutions
-> Impacts individual ability & need to provide
private benefits
-> Affects govt. ability to provide
benefits/enforce regulation
-> Corporate/institutional tax based on company
profits
=> affects product design/pricing/valuations/
profit calculation/cash flow
-> Encourages/discourages investment in products
e.g. tax advantage for saving in pension

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12
Q

Industry and business environment:

Range of products/services offered

A

Actuarial problems influenced by:

  • Needs of consumers & businesses
  • Financial products available on the mkt to help insurers manage their own risk e.g. Reinsurance availability
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13
Q

Industry and business environment:

Different types of product distribution channels

A

> Direct sales team
Internet (simple products can be sold)
Brokers
Independent financial advisors (complex products need to be explained)

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14
Q

Demographic structure & trends:

Demographic assumptions

A 
> Mortality   
> Disability
> Migration  
> Unemployment
> Lapse rates    
> Immigration
> Growth/Shrinkage of population
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15
Q

Demographic structure & trends:

Ageing population

A

-> Affects affordability of pension plans
=> Govt. may increase state pension age
-> Strain on social welfare systems
-> Reduced spending more saving
-> Reduced cost of education

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16
Q

Demographic structure & trends:

Employment trends

A

-> More mobile workforces
-> More women in workforce
-> People retire later rather than sooner
=> More phased retirements
-> Crime rate tends to be higher when unemployment is high

17
Q

Economic & social environment:

Economic conditions and trends -> Influences insurance sales & claims

A
  • > Willingness to buy insurance
  • > Cost of repairs & replacement parts
  • > Business failure/unemployment rates higher during recessions
  • > Theft fraud arson higher during recessions
  • > Mortality rates higher amongst less affluent
18
Q

Economic & social environment:

Economic conditions & trends -> Economic assumptions

A
  • > Interest rates
  • > Inflation eg. salaries, expenses, insurance claims
  • > Investment returns
19
Q

Govt. and Judicial environment:

Government policy

A
  • Concerns laws that might be enacted in the near future (political risks)
  • Consider election commitments from govt. & opposition parties
  • Also think about general legislation themes eg. national control vs privatisation over insurance services, competition vs barrier to entry; crime & punishment
  • Govt. might provide benefits such as:
    –> Social assistance
    o Non-contributory
    o Means-tested
    o Comes out of general taxation
    –> Social insurance
    o Contributions paid by members
    o Eligibility depends on contribution record
    o Might be paid by employer on member’s
    behalf
20
Q

Industry and business environment:

Details about financial planners & types of brokers

A

Financial planners:
- Provide advice on a whole range of products
Brokers
- Paid on commissions basis
—> Conflict of interest problem: Advisor/broker may
recommend unsuitable products to receive more
commissions (higher premiums, unnecessary
product features)
- Represent companies they sell products for
> Tied agents
o Trained by the provider of benefits
o Represent usually one company they sell product for
o Separate business from insurer
> Multi agents
o Sell products for a range of companies (usually >2)
o Usually represent multiple companies

21
Q

Industry and business environment:

Accounting standards & practices

A
  • Principles used to value assets & liabilities in insurer’s accounts to demonstrate solvency (or liquidity if its a bank)
  • Principles used to prepare accounts for statutory returns
  • Affects the wrappers used to bring products to market
22
Q

Industry and business environment:

Convergence of financial institutions

A
  • Financial institutions have increased the range of services they offer e.g. Banks provide insurance vice versa
  • This diversifies financial institutions’ portfolio
  • Possible downside: need to be aware of correlations b/w the risks
23
Q

Industry and business environment:

Corporate culture

A
  • Rules, values, procedures of the company
  • May specify standards of work for tasks e.g.
    o writing reports
    o documenting spreadsheets
    o peer reviewing a colleague’s work
  • Enhances the way stakeholder needs are met
  • Culture around acting in interest of stake/h
  • Managers are incentivized to act in interest of stake/h
  • May appoint non-executive directors to supervise
    corporate culture
  • Needs to be continually monitored for sustainability
24
Q

Industry and business environment:

What is Globalization? What are its implications?

A
  • Process whereby world economies become closely related
  • May lead to:
    o Closer trade & business links b/w different countries
    o Closer relationships b/w financial systems
    o Convergence of regulations/accounting systems
  • Opportunity to grow & have greater economies of scale
  • Opportunity to diversify portfolio across different mkts
  • Actuary needs to account for international practice/overseas events/legislation
25
Q

Industry and business environment:

Industry associations

A
  • Non-profits representing company groups/individuals in industry
  • Levy agreements to support members in difficulty
  • Represent industry to govt., media & public
  • Collect industry wide data from range of companies
  • Training/qualifications for people in their industry
  • Some regulatory roles require membership with industry association e.g. IFoA fellow actuary authorized to set reserves
  • Formed a group to have more collective weight than the individuals
26
Q

Economic and social environment:

Economic conditions & trends effects on insurance

A 
- Trends in:
    o Inflation 
    o Interest rates
    o Investment returns
Affect how insurers carry out business related operations eg. investment strategy, raising capital, reserving, pricing
  • Economic conditions influence insurance sales and claims:
    o Unemployment is higher during recessions
    o Arson and fraudulent claims are more during recession
    o Willingness to buy insurance is affected
    o Price elasticity is higher during recession (this may affect dbn channel used)
27
Q

What is the components of internal context institutions should consider?

A
  • Business objectives
  • Company structures & finances
  • Who are the key stakeholders?
  • What is the area of business?

CP1 Flashcards (26 decks)

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