Ch 2: The external environment Flashcards
Legislation vs Regulation
Legislation is a law declared by the government and regulation is used to implement legislation
2 Examples of compulsory insurance
1) Employers’ liability insurance
2) Motor third party insurance
Explain state benefit as an external environment
~ State provides benefits, however, usually low, just to keep citizens out of poverty
~ Take into account the benefits provided by the state when conducting financial planning, e.g.
- Individuals might need to provide less for themselves, e.g. employer sponsors half of health insurance
- No saving incentives, saving might not be worth it for individuals collecting state benefits
List 4 examples of how benefits from financial products and schemes can be taxed
1) Some benefits are tax free
2) Excess of benefits received over contributions can be taxed as income or capital gain
3) Benefits can be entirely taxed as income
4) A portion of the benefit can be tax-free, with the balance being taxed
Explain how items other than benefits can be taxed
- Contributions
- Accumulated returns
- Inheritance
- Contributions
Some financial products might give tax relief to contributions but then tax the benefits. Others might be paid from taxed income then the benefit is not taxed - Accumulated returns
Income and gains may be taxed during the accumulation phase, normally coupled with no tax on the policyholder’s gains - Inheritance
Insurance can be available to cover this tax liability
Define corporate governance and who manages it in SA
High-level framework on how a company’s managerial decisions are made. Managed by King IV
Aim of corporate governance; and how is it achieved (3)
Managed efficiently to meet the requirements of stakeholders. The regulator is concerned with not making own-interest decisions but stakeholder-interest decisions.
This is achieved through remuneration and shareholder options.
Can also appoint non-executive directors which gives an impartial view and sets remuneration.
Explain what a mutual society is
Mutual society has no shareholders and profits belong to the 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 shareholders.
- Finance can also be raised through the public.
e.g. Medical schemes and mutual banks
Explain what a proprietary is
~ Can benefit from the capital market, which results in economies of scale.
~ They have more dynamic management and they do have shareholders (pay dividends)
~ Larger can benefit from economies of scale and better management
~ Benefits of closeness of owners
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. The cycle will go 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 as a result of reduced competition since others have left the market) and in the light of emerging experience.
Now that the market is profitable again, competitors will join the market, and the cycle will continue.
Effects of an ageing population (4)
1) Older people tend to spend less and save more. This leads to lower interest rates and deflationary pressures on the economy.
2) 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 large retired population.
3) Increasing costs of healthcare systems lead to either higher levels of tax to be paid or reduced healthcare provisions by the state.
4) The cost per capita of educating the population will tend to fall.
What is a pay-as-you-go pension
Active members fund the pension of current members.
Explain the concept of emissions trading
This is a market based approach to address pollution, with the aim of minimising the cost of meeting an emissions target 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.
Give 4 examples of changing social and cultural trends
1) Increased home ownership increases the demand for mortgages.
2) Cuts in state healthcare increases the demand for private health insurance.
3) Increasing prosperity and longevity increases the demand for savings products.
4) Increased use of telematics for motor insurance, in many countries, allow the risk factors of the individual, the policyholder’s driving behavior and other factors to be monitored through a device installed in the insured’s vehicle or smart phone app.
Give 6 examples of technological advances than can have an impact on the availability of financial products, schemes, contracts and transactions.
1) Internet quotation and sales.
2) Price comparison websites.
3) Banking over the internet and phone.
4) Social media for advertising and links to sales/enquiry websites.
5) Insurance companies increasingly using websites to capture customer enquiries and register claims and transactions.
6) Email as a fully accepted and widely used means of communication.
