C2 - External Environment Flashcards
State two forms of insurance that are compulsory in some countries.
- Employers’ liability insurance
- Motor third party insurance
How regulations may influence the type of product most suited to a customer’s need?
- Limitation on charges for certain types of collective scheme may make that type of contract more suitable than another without the charge limitation, even though there are other disadvantageous features.
- The regulation of the sales process may influence the type of product that are brought to market.
- Taxation – rebate in premium and benefits
Give an example of how the regulation of the sales process may influence the type of product that are brought to market.
Requirements for detailed explanation to consumers may mean that complex products, in particular those involving benefit smoothing processes or derivative investment strategies, are not marketed however suitable they might be for consumers’ needs.
Why don’t state benefits alone necessarily meet the needs of citizens?
State often provide benefits at a low level which may only be sufficient to keep individuals just out of poverty.
Many individuals will want to have a higher level of benefit
Give an example of how an individual may receive a higher level of benefit than provided by state
1.Employer may provide benefits through a retirement benefit scheme or Membership of a private health arrangement/insurance
2. Savings
3. purchase of insurance products
Explain how the state benefits may be taken into account when considering the financial planning needs of individuals
- Individuals may need to provide less for themselves. E.g. emergency healthcare, state benefits deducted from total benefit in a retirement scheme
- State benefit can act as a disincentive to save
How will state requirements for individuals to save for their retirement will affect individual’s savings?
If the State requires individual to save for their retirement or other benefits, this will reduce the amount that individuals feel they can or need to invest in individual arrangements.
Describe how tax can affect an individual’s financial planning
Tax treatment of benefits/premiums
Tax treatment of benefits :
1. Benefits can be received free of tax.
2. The excess of the benefit received over the contributions paid can be taxed, either as income or capital gain.
3. The benefit can be taxed entirely as income.
Hybrid options : Portion of the ebenfit can be tax-free. Portion can be monetary amount, a percentage, or a combination of the two.
There may be a tax on contributions.
Inheritance tax.
Influence of accounting standards on financial products
Accounting standards may influence
1. Type of benefits that employers are prepared to provide for their employees
2. Design of financial products
Savings products could be launched under a number of different contract types (or ‘wrappers’), eg as:
Unit trust
OEIC
Pure endowment or endowment assurance (without-profit, with-profit or unit-linked)
Investment-linked product, eg a guaranteed equity bond
Deferred annuity
Each products may be subject to different accounting standards, each affecting the reporting of profits and/or solvency in different ways
How may capital adequacy be measured?
Excess of Assets over ( Liability + Capital requirements)
Expressed as a % of ( Liability + Capital requirements) or a multiple of capital requirements
Global trend is more towards risk based capital framework
Define corporate governance. How can it be implemented?
Corporate Governance: High level framework within which managerial decisions are made
A good corporate governance framework:
1. Encourages managers to act in best interests of stakeholders, rather than in their own personal interests
2. Incentivises managers in a way that achieves the first aim e.g. stock options
3. Utilises non-executive directors
Aims of corporate governance
Aim of corporate governance
The aim of good corporate governance is that a company should be managed efficiently in order to meet the requirements of its stakeholders – the shareholders, employees, pensioners, customers, suppliers and others who may be affected by the company’s operations.
One concern of regulators is that management might make decisions based more on their own personal interests than on those of other stakeholders.
Institutional/Corporate structure:
List key features of mutual, public and private proprietary companies.
Mutual societies– no shareholders
+ Better benefits as profits belong entirely to with-profit policyholders
- Restricted access to new capital, which may restrict product offerings
Surplus distributions of profit made, or contracts priced at cost
Proprietaries – shareholders
Public proprietary companies –
+ easier access to capital,
+ possible benefits from economies of scale and
+ more dynamic management
Private proprietary companies
- restricted access to capital,
+ possible benefits from close management involvement
Explain underwriting cycle (Competition/commercial requirements)
Profitability in insurance classes tend to go in cycles, driven by market forces of supply and demand, actual claim experience and economic climate.
When business is profitable, more insurers enter market, Premium rates reduce as insurers compete for market share
Leads to reduced profits or solvency problems. Position may be accentuated by catastrophes or by economic climate
At bottom of cycle, insurers leave market or reduce their involvement in classes. Premium rates increase to cover losses being incurred and in light of reduced competition.
Impact of social and cultural trend on financial products
- Increased home ownership increasing demand for mortgages
- Cut in State healthcare increasing demand for private health insurance
- Increasing prosperity, increasing the demand for saving products
- Increasing longevity, ultimately increasing the demand for retirement products and long-term care
Impact of Trends- Demographic
Effect of an ageing population:
1. Older people tend to spend less and save more. This leads to lower interest rates and deflationary pressures on the economy.
2. Some pay-as-you-go state pension schemes are becoming almost completely unsustainable as the income received from the working population falls short of that needed to pay the retired population
3. Increasing cost of healthcare systems, leading to either higher levels of tax to be paid or reduced healthcare provision by the State
4. Cost of educating the population will tend to fall. Education expenditure will reduce
Describe, giving examples, how technological changes have influenced financial products and providers
- Internet sales
- Price comparison sites
- Use of website to:
a. Capture enquiries
b. Record changes to client’s personal details
c. Register claims
d. Perform other admin tasks - Use of social media to advertise, sale and customer enquiry
- Use of emails for communication
