4. Financial Products & Customer Needs Flashcards
What do people in countries with no/little state benefits instead use as a safety blanket?
Financial contracts or schemes
What is the term for when social security benefits are only given to the poorest in society?
Means tested
What does a means tested social security system encourage?
Encourages individuals to not make alternative private pension provisions
What is the main risk for an individual when it comes to social security benefits?
Political risk that these may be withdrawn in future
Name the 6 types of social security benefit
(PISMHL)
- Pension
- Income support due to unemployment, illness or disability
- Survivor benefit
- Medical care
- Long-term care
- Housing support
What’s the definition of insurance?
Benefit in return for series of payments which starts or ends on a pre-specified event. Could be a payment to a 3rd party instead
Who is insurance benefit contingent on life paid to?
Heirs
What is reinsurance?
Ceding some of the risk an insurer has accepted to a re-insurer in exchange for premium
What’s the definition of a pension scheme?
An accumulation of funds paid out upon a specified event (generally retirement)
What 3 things do pension schemes do to meet customer needs?
- Retirement income
- Protect against financial impact of death
- Accumulate assets to pay off e.g. mortgage
How does a pension scheme ensure standard of living is maintained
By accumulating interest so income is maintained in real-terms
What are the 3 insurance principles which decide contract design and benefits? (PIP)
- Pooling of risk
- Insurable interest
- Pre-funding
Why is it essential that an insurance contract involves an insurable event?
Policyholder must have an interest in the claim not happening so they won’t encourage it to occur
What is the term for if a policyholder didn’t have an interest in the claim not happening so they would encourage it to occur
Moral hazard
What is pre-funding?
One putting money aside in advance of the occurrence of an event
What is the 3 risks with pre-funding rather than insuring?
- Event timing
- Cost of event
- Return that can be earned on the pre-funding money before event
What is the concept of pooling risk?
Pooling finances allows a group to protect individuals against uncertainty
Give 3 examples of pooling of risk
- Retirement community
- Trade union
- Employee association
When pooling risk, what additionally benefits from economies of scale?
Fixed or admin costs
What 4 things do an investment bank do? (APII)
- Advise on mergers
- Provide trading services for bonds, equities & derivatives
- Issue shares & bonds to finance firms raising capital
- Invest in markets
What do retail banks do?
Provide savings and loan products to individuals & small businesses
Name 3 bank assets (CES)
- Cash
- Expected future loan payments
- Securities
Name the 5 risks that banks face (DIPFC)
- Default risk
- Interest rate changes
- Process risk
- Fines from failing to meet regulation
- Cashflow issues
Why does a bank not need to hold a buffer on current account deposits?
There will be a limit on when a customer can withdraw a given sum of money and will pay a slightly lower interest rate
Is a credit card a secured loan?
No, no collateral taken
Is a personal loan secured?
Yes, collateral is taken
How long is a personal loan interest rate fixed for?
The duration of the loan
Are corporate loans secured?
Usually are since most firms have tangible assets
Are corporate loans generally fixed or variable in interest rate?
Generally variable
What additional risk does a bank using a house as mortgage collateral incur?
Market risk
What are derivatives?
A financial instrument whose value depends on the value of another investment (e.g. shares)
Who does a bank act as an intermediary between?
Matching buyers & sellers or savers & spenders
What is a mortgage backed security?
Where banks repackage mortgage repayments to sell
What is an asset backed security?
Repackaging of loan repayments to be sold to investors
How are ABSs usually made up?
Banks split loans into homogenous groups to create tranches of ABSs
How may a supermarket use ABSs?
If they sell items on credit but want the money now
What is PPI?
Insurance to protect against if repayment are unable to be made due to accident or illness
Which 2 groups was PPI mis-sold to?
- Self-employed customers
- Those who already had alternative provision
What does an investment scheme do?
Where an individual makes a series of investments with the expectation that more is paid back
Name the 4 logical needs of financial product stakeholders (MPAA)
- Maintain lifestyle
- Protection
- Accumulation for known purposed
- Accumulation for purposes as yet unknown
