Ch2 : external environment

Question 1

State benefits + effects

Answer 1

• State provides benefits to its citizens. Often at a low level. Level of benefits from state will influence level
  of personal & employer provided benefits
• May require compulsory contributions
• 3 effects
• Individuals may need to provide less for themselves
• Reduce levels of saving if benefits are means-tested - no savings incentive
• Can introduce moral hazard - risk of individuals relying on the state and not
  purchasing their own cove

Question 2

Aims of regulatory requirements relarting to capital adequacy and solvency for insurers

Answer 2

• create an early warning system so that regulators can intervene if capital is not enough
• reduce the riskof insuresr not bieng able to meet claims
• to reduce losses suffered by policyholders in the event that an insurer is unable to meet claims
• to ensure confidence in the insurance sector

Question 3

Explain why insure may stay in a loss making market

Answer 3

• Loss leader - they offer the product to attract sales of other more profitable products.
• Costs of withdrawing and re-entering later on when the market picks up
• Cross-subsidising - the cycles of two businesses may be out of phase. so they can use the profits in one to offset the losses in the other.
• Anticipated profits from upswing are perceived to be more than the accumulated losses in the botton of the cycle.

Question 4

Aim of corparate goveranace

Answer 4

• Efficiently meet the needs of stakeholders
• Ensure mangers act in the interests of stakeholders.

Question 5

Two approaches for mutuals in product pricing

Answer 5

1. Surplus distribution - distributes profit to members according to set rules
2. Price at cost - design products with low margins.