Ch 11: General Biz Environment (1)

Question 1

General business environment factors to consider: (9)

Answer 1

• Propensity of consumers to purchase products
• Methods of sale
• Remuneration of sales channels
• Types of expenses and commissions, includin influence of inflation
• Economic environment (including developing/volatile economies and risky markets)
• Legal environment
• Regulatory constraints and opportunities
• Fiscal constraints and opportunities
• Professional guidance constraints and opportunities

Question 2

Distribution channels

Answer 2

• Insurance intermediaries, who select products for their clients from all or most of those available on the market.
• Tied agents, who offer products of one life insurance company or a small number of companies
• Own sales force, ussualy employed by a particular company to sell its products direct to the public
• Direct marketing via press advertising, over the telephone, internet or mailshots.

Question 3

Propensity of consumers to purchase products is affected by: (2)

Answer 3

• Consumers generally need to be educated as to the benefits of life insurance and be encouraged to buy, which will involve a salesperson.
• Insurer runs the risk of selling a policy which does not meet the agreed need of the PH.

Question 4

Why might people not be aware of or have a desire for buying life insurance products? (5)

Answer 4

• Public are unaware of the need, either through ignorance or belief that the event wont happen to them.
• Death may be a taboo subject
• Products are difficult to understand
• Difficult marketplace - many providers and products
• General need for advice before making long-term financial commitments, which makes the whole process time consuming.

Question 5

Risks of selling a product which does not meet the agreed needs of PH (2)

Answer 5

• Persistency risk - resulting in financial losses, including the possibility of compensation (increased for early durations where the possibility of making a loss on surrender is greater)
• Reputational risk

Question 6

Effects of distribution channels and factors to consider

Diff in customers & other factors

Answer 6

• Different distribution channels tend to reach different types of people (demographic experience) thus resulting in class selection
• Certain target markets are better reached through some distribution channels
• The customers may differ in:
  * Financial sophistication
  * Keenness to take out a contract
  * Levels of income
  * Consequently the mortality and withdrawal experience secured may not be the same
• Level of underwriting applied
• These differences in expected experience would need to be reflected in the assumptions used in contract pricing.
• Need for competitive terms varies by channel, thus importance on compeitive terms varies.
• When channel reaches more financially sophisticated market then more complex products are possible, however internet + telephone may have to be simple regardless.

Question 7

Why intermediaries may have the most stringent underwriting (4) and (1) against this argument

Answer 7

• Intermediary wants the best deal for his client and thus may encourage anti-selection
• Customer is initiating the sale which may increase the risk of anti-selection compared with say a customer targeted by a company salesperson
• Intermediaries may attract high net worth people whi may need higher insurance cover.
• Prices would need to be competitive wich may only be achievable by careful selection of good risks.
• One thing against this argument may be that stringent underwriting may in itself be uncompetitive and may discourage business. (If say applicants are refused cover regularly the intermediary may stop recommending that company.

Question 8

Ways to be competitive on contracts other than price (5)

Answer 8

• Innovative features
• Attractive options
• Complexity may hinder comparability
• Savings products may be measured on past investment performance
• Level of customer service or support