2 - External Environment + Rayno's for completion Flashcards
How do the external environment factors affect the actuarial control cycle?
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
Components of the External Environment
- Laws and Regulatory environment
- Govt. and Judicial environment
- Climate and natural perils
- Economic and social environment
- Industry and business environment
- Physical environment
Laws & Regulatory environment considerations:
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
Govt. and Judicial environment considerations:
- Judicial decisions & precedents
- Government policy
- Taxation (affects govt ability to implement govt. policy)
- Affects product range offered (due to state benefits)
Physical environment:
Climate & natural perils considerations
- 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
Economic & social environment considerations:
- Economic conditions and trends
- Demographic structure and trends
- Work & employment patterns
- Social factors & trends
- Industrial & labour union issues
Demographic structure & trends considerations:
- These affect demographic assumptions
- Increased longevity + reduced birth rate => ageing
population - Employment trends
Industry and business environment considerations: (14)
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)
Govt. and Judicial environment:
Judicial decisions & precedents
- > Affects interpretation of legislation
- > Interpretation of insurance policy wording
- > Could increase amount of claims for liability products if judicial decisions go against insurer
Govt. and Judicial environment:
Competition vs Barriers to entry
- 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
Govt. and Judicial environment:
Taxation
-> 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
Industry and business environment:
Range of products/services offered
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
Industry and business environment:
Different types of product distribution channels
> Direct sales team
Internet (simple products can be sold)
Brokers
Independent financial advisors (complex products need to be explained)
Demographic structure & trends:
Demographic assumptions
> Mortality > Disability > Migration > Unemployment > Lapse rates > Immigration > Growth/Shrinkage of population
Demographic structure & trends:
Ageing population
-> Affects affordability of pension plans
=> Govt. may increase state pension age
-> Strain on social welfare systems
-> Reduced spending more saving
-> Reduced cost of education
Demographic structure & trends:
Employment trends
-> 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
Economic & social environment:
Economic conditions and trends -> Influences insurance sales & claims
- > 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
Economic & social environment:
Economic conditions & trends -> Economic assumptions
- > Interest rates
- > Inflation eg. salaries, expenses, insurance claims
- > Investment returns
Govt. and Judicial environment:
Government policy
- 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
Industry and business environment:
Details about financial planners & types of brokers
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
Industry and business environment:
Accounting standards & practices
- 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
Industry and business environment:
Convergence of financial institutions
- 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
Industry and business environment:
Corporate culture
- 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
Industry and business environment:
What is Globalization? What are its implications?
- 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
Industry and business environment:
Industry associations
- 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
Economic and social environment:
Economic conditions & trends effects on insurance
- 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)
What is the components of internal context institutions should consider?
- Business objectives
- Company structures & finances
- Who are the key stakeholders?
- What is the area of business?
