Ch 12: General Biz Environment (2)

Question 1

Effect of the economic environment on insurer (6)

Answer 1

• Availability of asset types and expected yields
• Effects probability of securing return assumed when setting premium rates
• More volatile markets may have more expensive insurance products and possible less take up
• More volatile markets affects:
  * Higher capital requirements as result of uncertainty
  * Increased cost of capital and thus increased charges and premiums
  * Insurer operating in more risky markets is liekly to seek a greater expected rate of return on capital and hence relatively greater risk of desired return not achieved

Question 2

When insurer has discretion in contract insurer is at risk of: (2)

Answer 2

• PRE acting unfavourably against the company
• Unfair contract terms voiding clauses of the contract

Question 3

Legal environment effects (4)

Answer 3

• Constraint on product design (what is allowed and what may be risky to be not allowed in future)
• Contract wording
• Discretionary components in contract design (reviewable charges + discretionary bonuses) scrutinised and legal action may be taken
• Contracts span many years and are open to developing legal cultures, intrepretations and court judgements
• Risk that new legislation could be introduced that could change legal contract with existing PHs

Question 4

Need for regulation (2)

Answer 4

• Protection of policyholder
• Confidence in market

Question 5

Possible regulations on insurers: 7 and 6 for investment regulations

Answer 5

• Restriction on the types of contract that may be offered
• Restriction on the premium rates or charges (may be the rates themselves or the basis on which they are calculated)
• Restriction on rating factors that may be used to calculate premiums (example gender or age)
• Requirements relating to the terms and conditions of contracts (example how surrender values should be calculated)
• Restriction on the channels through which insurance may be sold or reqs on the procedures or info required as part of selling process
• Restriction on the ability to underwrite (genetic testing) or to differentiate between different classes of policyholder.
• Indirect constraint on amount of business that may be written (min amount of reserves to be held)
• Investment restrictions such as:
  * Types of assets held
  * Amount invested in particular asset or counterparty
  * Permissable assets for solvency calcs
  * Extent of mismatching + mismatching reserve
  * Min proportion invested in certain assets (gov bonds)
  * Method to value assets

Question 6

Climate change regulations: Aims including ensuring that financial institutions: (3)

Answer 6

• Consider climate risks in existing business planning, investment management and risk management processes.
• Effectively disclose and report on climate-related risks and opportunities
• Adopt a consistent and reliable means of assessing, pricing and managing climate related risks.

Question 7

Effect of fiscal regime (4)

Answer 7

• Different types of life business may be taxed by different methods
• Competition with other savings institutions: Tax treatment of life insurance business may make life insurance as savings medium less/more attractive compared to savings institution products
• Tax concessions available to individuals may make sale of certain products easier
• Risk that tax can change over time and affect guaranteed benefits

Question 8

Effect of professional guidance (2)

Answer 8

• Framework of responsibilities
• Restrict actions of actuaries but also provide pressure from proprietors to agree to certain courses of action