CH:2 External environment

Question 1

What is the difference between legislation vs regulation

Answer 1

Legislation is law declared by the government and regulation is used to implement legislation

Question 2

List four examples of how benefits from financial products and schemes can be taxed

Answer 2

• Some benefits are tax-free
• Excess of benefits received over contributions can be taxed as income or capital
• Benefits can be entirely taxed as income
• A portion of the benefits can be tax-free, with the balance being taxed

Question 3

Explain what a mutual society is

Answer 3

Mutual society has no shareholders and profit belong to policyholders.

No shareholders mean:

• They provide the same benefits, but are cheaper because the dividends don’t have to be paid or distribute profits to policyholders
• Finance also cannot be raised through the public.

Example: Medical schemes and mutual banks

Question 4

Describe the underwriting cycle

Answer 4

Profitability in the various insurance classes tend to go in cycles, driven by market forces of supply and demand combined with actual claims experience and economic climate.

When business is profitable, more insurers enter the market. Premium rates reduce as insurers compete for market share.

This leads to reduced profits or to losses, loss of business and reduced solvency, and the cycle goes into depression. The position may be accentuated by catastrophes or by the economic climate.

At the bottom of the cycle, insurers leave the market or reduce their involvement in the classes concerned. Eventually, premium rates increase to cover the losses being incurred and in the light of emerging experience.

Question 5

List the factors to consider in relation to the external environment

Answer 5

CREATE GRAND LISTS

• Corporate structure
• Regulation and legislation
• Environmental issues and climate change
• Accounting standards
• Tax
• Economic outlook
• Governance
• Risk management requirements
• Adequacy of capital and solvency
• New business environment
• Demographic trends
• Lifestyle considerations
• International practice
• State benefits
• Technology
• Social and cultural trends

Question 6

What is the aim of corporate governance

Answer 6

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.