CH 2: External environment Flashcards
List 16 external environment considerations
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
CREATE GRAND LISTS
Corporate Structure:
Mutuals 5 Points
Mutuals
* Started by benefactors lending initial capital, no req to pay back unless profits emerge
- No shareholders, profits belong to policyholders
- Better benefits for the same cost
- Finance cannot be raised from capital markets, restrict products offerred.
2 methods of pricing
- Surplus distribution: with profit company
- Pricing at cost
Corporate Structure:
Proprietaries 4 Points
Proprietaries
* Public or private
- easier access to capital markets for finance ( exclu private prop)
- economies of scale
- more dynamic management
Regulation and Legislation:
Legislation and regulations, definitions and explanation
Legislation: Law formally declared by the governing body
Regulation: a secondary form of legislation, used to implement the primary legislature
- Influence the types of product available
Regulate the sale process :
- Compulsory benefits, max charges, disclosure of info
Environment and Climate change:
3 Points
- influence the ways in which Government, advocacy groups and individual participants act, and hence the behaviour of financial markets
- has led to providers offering products that promote environmental and ethical issues
- affects how providers communicate with customers, eg reducing the amount of paperwork
Accounting standards:
3 Points
- May influence an employer’s provision of employee benefits
- Influence the range of products marketed and their wrappers
- Wrapper: How the product is brought to the market
eg. Savings product as endowment assurance
Tax:
3,2,1
Benefits
- Tax free
- Excess benfit over contributions
- Entire benefit (tax free threshold)
- eg Inc protection premiums tax deductible and benefit taxed - insure gross income
Contributions
- Double tax is avoided, taxed on contributions then no tax on benefit. vice versa
- Income Tax/ CGT
Influence over type of products avaialble in market
Economic outlook
1
Business cycle affect on macro factors, eg inflation, interest, exchange rates
Governance
Def + Aim + Strategy 1,1,2,1
High-level framework for managerial decisions in a company
Aim: Efficient management of company in order to meet requirements of stakeholders (not only management interests)
Strategy:
- Remun should incentivise management to act for stakeholders. eg share options.
- Non-exec directors, impartial view set rem for execs
King IV report, standard of good corporate governance
Risk management requirements:
2
- Form part of regulation that imposes min level of risk management.
- Required to hold capital provisions to account for risk
Adequacy Capital and solvency:
2,4
Calc of capital reserve and excess capital required use:
- Solvency Assessment and Management: capital req measured on risk based approach
- Basel: used for banks capital required.
Aims of the regulatory requirements:
- Reduce the risk of insurers being unable to meet claims
- Reduces losses suffered by policyholders when insurers can’t meet claims
- Early warning system for regulators to intervene when capital is not adequate
- Ensure confidence in the insurance sector
New business environment
Underwriting cycle 4,3,2
Underwriting Cycle
1. Business is profitable => New Entrants, greater competition, lower premium rates =>
2. Reduced Profits (depression), companies don’t generate profits=>
3. Insurers Exit or reduce involvement =>
4. Less competition, increased premium rates =>** Profitable Business**
Some remain in loss making market:
- Acc losses < expected profit.
- Cost withdraw and re- enter too high
- Loss leader products offerred first.
Profit patterns
- Long term: Profit and losses even out
- Short term: Profitable classes may subsidise losses in other classes
Demographics:
1,2,3
- Impact on benefit providers experience, assumptions.
2 sources of population ageing:
- Rising life expectancy
- Declining fertility
Results of old population:
- Less Spendin, saving for retirement
- Strain welfare systems, unsustainable
- Cost of healthcare increases.
Lifestyle considerations:
4
- Younger people: have higher demand for loans rather than savings
- People with dependents: look towards life insurance protection products
-
Older people:may have a need for annuities and long-term care products.
Longevity => more saving and for longer, so assets aren’t exhausted before death. Higher demand for savings and less spending - Retired: no savings and high spending. need for annuities
International practice:
2
- Providers may look at the suitability of replicating overseas products in the domestic market
- differences in tax and legislature must be considered
