Ch 11: General business environment, 1

Question 1

Summary Card

Answer 1

• Distribution channels - general
• Insurance intermediaries
• Tied agents
• Own salesforce
• Direct marketing
• Influence of distribution channel

Question 2

Discuss the propensity to purchase products

1.2.2

Answer 2

• Depends on inclination of PH & power of insurer to sell.
• Power= knowledge + info
  
  • Imbalance bet buyer and seller.
  • Creates opp to exploit PH. => regs prevent this
• Insurer risks selling products that dont MCN
  
  • Lapse risk, Persistency, Reputational
  • Min risk by clear policy wording, ensure behave professionally.

Question 3

List the factors in the general business environment which affect a life insurer’s business (8)

Another useful acronym from CA1/ARM

(CREATE GREAT LISTS)

Answer 3

DERLF PEP

1. Distribution channels used and their impact
2. Economic environment
3. Regulatory contraints/opportunities
4. Legal environment
5. Fiscal regime
6. Propensity of consumers to purchase products
7. Expenses and commission
8. Professional guidance

Useful CA/ARM list for the external environment within which insurer’s operate

• Competition & the underwriting Cycle
• Regulation
• Environmental & Ethical considerations
• Accounting standards
• Tax
• Economics (interest rates, inflation, economic growth, exchange rates)
• Governance (corporate)
• Risk management (operational, credit, market)
• Experience from overseas
• Adequacy of capital and solvency requirements
• Trends (demographics
• Lifestyle
• International practice
• Social trends
• Technological changes
• State benefits

Question 4

List 4 distribution channels used by life insurance companies

Answer 4

• Insurance intermediaries/independant financial advisors
• Tied agents
• Own salesforce
• Direct marketing

Question 5

Describe insurance intermediaries (5)

How they work (3)

How they are remunerated (2)

Who initiates the sale (1)

Answer 5

• Salespeople act indpendantly of any insurer
• Aim to find contract that best meets clients’ situation/needs (premium and benefits)
• Provide expertise and time to find right product.
• AKA: independant financial advisors and insurance brokers
• Remunerated via
  
  • commission pmts from companies whose products they sell
  • fee from clients
• Sales often client-initiated, however, can also promote themselves e.g. initiating periodic reviews

Question 6

Describe tied agents

How they work (3)

How they are remunerated (1)

Who initiates the sale (1)

Answer 6

• Work solely on behalf of one or several insurers i.e. offer clients only products of those companies
• Where tie is to multiple companies, sometimes product ranges are mutual exclusive, but often overlap
• Typically employees of bank or other similar financial institution
• Remunerated via commission pmts or salary plus bonuses by companies to which they’re tied
• Sales often client-initiated, but tied agents may actively engage in selling.

Question 7

Describe an insurer’s own salesforce

How they work (1)

How they are remunerated (1)

Who initiates the sale (1)

Answer 7

• Usually employees of insurer and only sell products of that company
• Remunerated by commission and salary or mixture of both
• Usually the salesperson initiates the sale, making use of client lists or purchased leads (however, client my initiate any further sales)

Question 8

List 4 forms of direct marketing

Answer 8

• Internet selling
  
  • useful for without profits contract (simple)
  • quote online
  • apply online
• Press advertising
  
  • short application form
  • give telephone number or address
• Telephone selling
• Mailshots (promotional/advertising letters sent in batches)

Question 9

State 3 features of life insurance contracts that will be affected by the distribution channel used

Answer 9

• Contract design
• Contract pricing
• Demographic profile

Question 10

State how the choice of distribution channel can affect contract design (3)

Answer 10

• Higher clients’ financial sophistication, greater possible complexity
• Products sold via direct marketing may be less complicated than products sold face to face
• Insurer using multiple distribution channels may sell different versions of same product, varying by channel
• Policy should appear simple even when it is not

Question 11

State how choice of distribution channel can affect contract pricing

Underwriting level (4)

Need for competitive pricing of contracts (5)

Other aspects impacting competitive terms (4)

Assumptions (3)

Answer 11

• Effect of demographic assumptions through underwriting
  
  • underwriting level should reflect demographic assumptions used in pricing
  • strict underwriting for intermediaries
    
    • intermediaries reprsent client’s best interests, may thus encourage anti-selection
    • customers likely high net worth => higher insurance cover
    • prices need to be competitive
  • low underwriting: low sum assured;+> direct marketing
  • overly complicated underwriting = barrier to entry
  • Withdrawal rates dep on level of fin soph, initiation of sale, MCN
• Effect of need for competitive terms wrt price of contract (ITOD)
  
  • intermediaries recommend most competitive option
    
    • other things being equal, commission may be distinguishing factor, if market unregulated, offer more of this
  • tied agents should not damage good name
    
    • products should be reasonably competitive, however there’s no direct comparison (as tied to particular company’s prods)
  • own salesforce not usually in competitive position
    
    • e.g salesperson correctly recommends 15 yr-term assurance, but client may not shop around for better/best deal
  • direct marketing depends on target market
    
    • for financially sophisticated (e. financial paper) terms will need to be compeitive, less so for less financially unsophisticated
• Sales also depend on
  
  • innovative features/attractive options
  • complex prods difficult to compare
  • savings products compete on investment performance too
  • compeition on customer service/admin support

Question 12

How might choice of distribution channel used affect the demographic profile of contracts sold?

(1,4)

(1,1)

(1,1)

(1,1)

Answer 12

• Different distribution channels would attract diffferent demographic profiles differing by
  
  • Financial sophistication
  • Income:
    
    • Mortality/Lapse experience: correlated with income/financial sophistication
• Creates class selection
  
  • People can be classified by charac that affect mort experience.
  • Tgt mkt of dbn channel => effect experience eg smokers
• Independent intermediaries
  
  • more sophisticated customers, wealthier on average than public, will tend to seek out advice to managing more complex finaicial affiars
• Tied agents
  
  • variety of people differeing incomes/financial sophistications, certain minimum level implied by having bank account
• Direct marketing e.g. downmarket tabloid newspaper
  
  • leas financially sophisticated, relatively low income levels
• withdrawal affected by financial sophistication: customers having buyer’s guilt
  
  • unsophisticated customer more likely to do this, as hasn’t done research, or through deliberate mis-selling => lapses