CH4 - Financial products & customer needs

Question 1

Categories for benefits (5)

Answer 1

Benefits can be categorised as:

1. benefits on events that are unpredictable - both whether and when they might occur
2. benefits on events certain to occur, but unpredictable in time
3. benefits for immediate consumption
4. benefits on events predictable in time
5. benefits from the accumulation of disposable income and capital

Question 2

Types of provision (5)

Answer 2

The main types of provision fall into the following categories:

1. social security
2. financial products
3. contracts
4. schemes
5. transactions

Question 3

Social security benefits

Answer 3

The benefits offered by the State vary significantly by country. Such benefits may be means tested. The population is at risk from the State changing or withdrawing future benefits.

Question 4

Insurance contracts

Answer 4

Under insurance contracts, in return for a single payment (or a series of payments) the provider will pay an individual or any heirs an agreed amount (or series of amounts) that start or end on the occurrence of a pre-specified event. This event may happen to the individual, the individual’s property or a third party.

Question 5

Reinsurance contracts

Answer 5

These are used by providers to pass on some of the risk they take on.

Question 6

Pension schemes

Answer 6

A pension scheme involves the accumulation of funds paid out on a later event, for example retirement, death, or withdrawal from the scheme.

Question 7

Investment schemes

Answer 7

Investment schemes involve an individual paying a single payment or a series of payments to a provider with the expectation that a higher amount will be paid back at a later date.

Question 8

Derivatives

Answer 8

A derivative is a financial instrument whose value depends on the value of other investments (e.g. shares, bonds) or variables (e.g. interest rates, exchanging rates)

Question 9

Insurance principles (3)

Answer 9

There are three main principles of insurance:
1. insurable interest
2. pre-funding
3. pooling of risk
(Continuing care retirement communities and microinsurance are examples of pooling risk)

Question 10

Customer needs (2)+(2)

Answer 10

It is important to differentiate between a customer’s:

• logical and emotional needs
• current and future needs

Question 11

Customer’s logical needs (4)

Answer 11

A customer’s logical needs can be analysed as follows:

1. maintaining a current lifestyle
2. protection
3. accumulation for a purpose
4. accumulation for a purpose as yet unknown

Question 12

Customer’s emotional needs

Answer 12

Emotional needs are not identified in such a methodical way but are the result of what a customer thinks is needed or wants (rather than needs)

Question 13

Customer’s current needs

Answer 13

A current need is one triggered by an event that has an immediate effect on a customer’s circumstances, e.g. protection against sickness.

Question 14

Customer’s future needs

Answer 14

A future need may be one that relates to a customer’s future aspirations, e.g. to retire at a certain age.