Ch 2: The external environment Flashcards
List the factors to consider in relation to the external environment
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
External Environment:
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
- Require compulsory insurance in certain circumstances
- Influence the types of product available
- Regulate the sale process
What two forms of GI cover are compulsory in many countries?
- Employer’s liability
2. Motor third party liability
External Environment:
Tax
- Tax treatments will have an impact on the needs of individuals
- Affects the type and form of products offered by the financial service industry
- Means that product innovations may be designed to avoid paying tax
- Inheritance tax will change the amount of money passed down
- Directs savings towards the most tax-effective forms of tax shelters
List four examples of how benefits from financial products and schemes can be taxed
- Benefits can be received free of tax
- The excess of benefits over contributions can be taxed as income or as capital gains
- Benefits can be taxed entirely as income
- A portion of the benefits can be tax-free, with the balance being taxed
Explain how items other than benefits can be taxed
Some arrangements may offer tax relief on contributions, normally coupled with tax on the resulting benefits. Alternatively, contributions may be paid from taxed income, normally coupled with tax relief on the resulting benefits.
Income and gains may be taxed during the accumulation phase, normally coupled with no tax on the policyholder’s gains.
Tax may be payable on inheritance. Insurance can be available to cover this tax liability.
Define corporate governance and outline the features of a good corporate governance framework
Corporate governance is the high level framework within which a company’s managerial decisions are made.
A good corporate governance framework:
1. Encourages managers to act in the best interests of stakeholders, rather than in their own personal interests
2. Incentivises managers in a way to achieve the first aim
3. Utilises non-executive directors
4. influences the way in which stakeholders’ needs are met
What are the key features of mutual and proprietary financial providers?
Mutuals - no shareholders:
- Better benefits as profits belong entirely to with-profit policyholders
- Restricted access to new capital, which may restrict product offerings
- Specific distributions of profit are made, or contacts
priced at cost
Proprietaries: shareholders:
- Public proprietary companies
* * easier access to capital markets for finance
* * possible benefits of economies of scale
* * more dynamic management
- Private proprietary companies
- restricted access to capital
- possible benefits from close involvement of owners (owners may have access to significant additional capital, edge over mutauls and public proprietaries)
- Profits may be shared between shareholders and with profit policyholders
Describe the underwriting cycle
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.
Give four examples of changing social and cultural trends
- Increased home ownership increases the demand for mortgages
- Cuts in state healthcare increases the demand for private health insurance
- Increasing prosperity increases the demand for savings products
- Increased use of telematics for motor insurance, in many countries, allows the risk factors of the individual, the policyholder’s driving behavior and other factors to be monitored through a device installed in the insured vehicle or a smart phone app
Demographic changes
two main sources of demographic changes leading to population ageing:
* rising life expectancy and
* declining fertility.
Give 4 examples of the effects of an ageing population on the economy or State
- Older people tend to spend less and save more. This leads to lower interest rates and deflationary pressures on the economy.
- Some pay as you go State pension schemes are becoming unsustainable as the income received from the working population falls short of that needed to pay the retired population
- Increasing costs of healthcare systems lead to either higher levels of tax to be paid or reduced healthcare provision by the state
- The cost per capita of educating the population will tend to fall
List potential impacts of climate change on population trends:
- mass migration from areas at higher risk of flooding due to heavy rainfall and rising sea levels
- increased morbidity and mortality
- increased incidence of diseases in some areas increased
- conflict and wars.
Explain the concept of emissions trading
This is a market based approach to address pollution, with the aim of minimizing the cost of meeting an emissions target set by the government.
The government issues permits to emit up to the overall limit. Permits are sold or are equal to historical trading emissions for each polluter. A participant can use permits exactly, or emit less and sell the excess permits, or emit more and buy permits from other polluters.
The usual aim is for the government to lower the overall limit over time.
Lifestyle considerations
- younger people have preferences for loans rather than savings
- people with children may have a need for life insurance protection products
- older people may have a need for annuities and long-term care products
