Ch 11: General business environment, 1

Question 1

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

Answer 1

FREED PPL

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

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 2

List 4 distribution channels used by life insurance companies

Answer 2

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

Question 3

State 2 main risks to a life insurer if a policy is sold which does not meet agreed policyholder needs

Answer 3

• Reputational risk
• Persistency risk
  
  • consequent financial loss, inculding possibility of compensation

Question 4

Describe insurance intermediaries (5)

How they work (3)

How they are remunerated (2)

Who initiates the sale (1)

Answer 4

• Salespeople act independently of any insurer
• Searches for contract that best meets clients’ situation/needs (premium and benefits)
• AKA: independant financial advisors and insurance brokers
• Remunerated via
  
  • commission payments from companies whose products they sell
  • fee from clients
• Sales often client-initiated, however, can also promote themselves e.g. initiating periodic reviews

Question 5

Describe tied agents

How they work (3)

How they are remunerated (1)

Who initiates the sale (1)

Answer 5

• 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 mutually exclusive, but often overlap
• Typically employees of bank or other similar financial institution
• Remunerated via commission payments or salary plus bonuses by companies to which they’re tied
• Sales often client-initiated, but tied agents may actively engage in selling.

Question 6

Describe an insurer’s own salesforce

How they work (1)

How they are remunerated (1)

Who initiates the sale (1)

Answer 6

• 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 7

List 4 forms of direct marketing

Answer 7

• 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 8

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

Answer 8

• Contract design
• Contract pricing
• Demographic profile

Question 9

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

Answer 9

• 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

Question 10

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 10

• Effect of demographic assumptions through underwriting
  
  • underwriting should reflect demographic assumptions used in pricing
  • strict underwriting for intermediaries
    
    • intermediaries represent 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; overly complicated underwriting = barrier to entry
• Effect of need for competitive terms wrt price of contract
  
  • 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 products)
  • 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 competitive, less so for less financially unsophisticated
• Beyond competitiveness via price of contract
  
  • innovative features/attractive options
  • complex prods difficult to compare
  • savings products compete on investment performance too
  • competition on customer service/admin support
• 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
• Effect on assumptions
  
  • e.g mortality and morbidity

Question 11

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

(1,4)

(1,1)

(1,1)

(1,1)

Answer 11

• Different distribution channels would attract different demographic profiles differing by
  
  • Financial sophistication
  • Income:
  • Mortality experience: correlated with income/financial sophistication
  • Persistency experience
• Independent intermediaries
  
  • more sophisticated customers, wealthier on average than public, will tend to seek out advice to managing more complex financial affairs
• Tied agents
  
  • variety of people differing incomes/financial sophistication, certain minimum level implied by having bank account
• Direct marketing e.g. downmarket tabloid newspaper
  
  • less financially sophisticated, relatively low income levels