Chapter 1 Flashcards
Give an example of a risk that can be managed and a risk that requires financial protection (eg risks associated with property)
Risk that can be managed - Forgetting to lock your door and having valuables stolen
Risk that requires financial protection - Well locked property targeted by gang, broken into an robbed - home contents insurance
In which ways are risks usually categorised?
2 ways
Level and severity of impact
Likelihood of occurrence
Give an example of a low impact risk and a high impact risk (eg regarding property)
Low impact- wall around property needs to be rebuilt due to wear and tear
High impact- property catching fire and burning to the ground
Give an example of a risk with higher and lower likelihood of occurrence in the UK (eg natural disasters)
Lower likelihood- earthquake
Higher likelihood- flooding
Which kinds of things make the most sense to insure and which make the least sense? (Think impact/occurance)
Compulsory insurance - motor insurance
High impact/low frequency - High impact as this will most affect your life, low frequency means there will usually be cover available
High impact/ high frequency- insurers less likely to offer cover
Low impact/low frequency
Give an example of each quadrant of the risk matrix
Low frequency/ low impact - minor injury (stubbing toe)
Low frequency/high impact - death/serious illness
High frequency/low impact - minor car accident
High frequency/ high impact - unemployment for an actor
What does life assurance do?
Life assurance transfers the risk from you to a group of individuals known as a mortality pool - usually most cost effective way for a consumer to cover such a risk
What does the annual risk of death chart show?
A chance of 1 in X chance of dying in the next year split by age and gender
In the UK, what is meant by the term protection insurance?
An insurance contract that provides the consumer with financial sums in the event of death, disability or long-term illness
What reasons might stop consumers from providing themselves with the cover they need?
Failing to fully understand the impact of the risks
Confusing the role of savings versus insurance
Miscalculating the impact or frequency of death, disability or serious illness
What was the historical attitude of the life insurance industry?
Focused on traditional model of male bread-winner with wife, kids, mortgage and car
Individuals would start life with no protection needs and would gradually increase over time
Serviced by door to door insurance salesman
Access was easy but choice and value for money limited
How does an individual’s need for protection change as they go through their life?
When we are born we are reliant on our parents/carers for everything
Leave home and start working and perhaps buy a house - need for protection of an individual nature
Marry/ have kids - protection is more about providing for family (less self focused)
What are some reasons that the attitudes of consumers have changed regarding financial protection products?
More support from UK welfare system
Changes in family structure
Greater scrutiny of insurance industry
Advances in technology
Pressure on income affecting affordability
What used to be the biggest reason for consumers not taking our life cover? What is it now?
Used to be “I cannot afford it”
Now “I have not thought about it”
What is a major reason why consumers favour buying financial products online or via telephone rather than seeking out face to face advice?
Lack of trust in financial advisers caused by newspaper headlines, advisers charging commission and robo advice
What is the formula for the protection gap?
The protection gap = (Income/capitals needed by loved ones) - (Existing individual and employer sponsored cover)
Why are consumers failing to take out sufficient cover?
Cover is too expensive
Consumers do not trust providers to pay out claims
What is mortality, what insurance products is this mitigated by, what happens if mortality increases?
The risk of death
Term, endowment, whole of life
If mortality increases so do premium rates
What is morbidity? What insurance products is this mitigated by?
Risk of illness
Critical illness cover, income protection insurance and long term care insurance
What influences which financial protection policies a consumer might select?
Needs
Budget
Personal views
What additional distribution channels are there nowadays as well as door to door salesmen?
Single-tied advisers, selling one insurer’s product
Multi-tied advisers, selling from a panel of insurers
Independent or whole of market advisers, selling products form the entire range of insurers
What is the retail distribution review?
Who was it carried out by?
When was it launched?
When was it implemented?
The RDR was a market review which changed how retail investment products are sold
Carried out by Financial Services Authority with Financial Services Skill Council
Launched in 2006, legislation implemented 31st December 2012
What were the aims of the RDR?
Ensure advisers have higher levels of technical knowledge and understanding
Raise standards of financial advice
Increase consumers confidence
Help align financial advisers with other professionals
Attract and retain higher quality recruits to the industry
Heighten public awareness of roles played by financial advisers
How did the RDR change the way consumers pay advisers? What is an exception to this?
Moved away from charging commission to advice-fee system
Financial protection advice and product recommendation is one area where commission can still be charged
How does face to face advice differ from direct sales via the internet when it comes to highlighting the impact/risks associated with financial protection?
Face to face advice is much more likely to highlight these, whereas direct sales via the internet show the consumer an array of confusing products
Name factors related to the individual that affect the sales of insurance policies
Age, health, occupation, and what stage of life they are in
What external factors affect the sales of insurance policies?
Housing market, how often the individual moves home and economic climate affecting jobs and income levels
What forms can financial protection take?
Life cover
Liabilities such as debts and mortgages
Sickness cover
Protection against inheritance tax
Businesses protecting their profits against loss
Income/ cash to help with long term care costs
How have changes in working patterns affected the consumers needs for financial protection?
Employees used to work for same employer most of their life
Now employees change jobs and employers more often leading to fragment working patterns and greater consequences in event of serious illness and disability
Employer less likely to take care of employees as many are only with them for short periods
Greater number of people now self employed- no employer to look after theny
How have changes in the law affected the premiums paid by men vs women?
Historically men have higher rates of mortality and women higher rates of morbidity - men paid more for life cover, women paid more for morbidity related insurance
The EU Gender Directive changed this - since 21st December 2012 insurers cannot charge different premiums for men and women
Case brought before ECoJ argued this is gender discrimination
How did smoker and non-smoker products come about?
Initially some providers did not offer different premiums for smokers and non smokers
Non-smoker went to other providers for cheaper premiums whereas these providers tended to get more smokers
Smokers are higher risk consumers so these providers were not making as much money
What are preferred life policies?
Where providers offer substantial discounts on premiums for those who can prove a high level of fitness whereas premiums are raised for those who can not
Vitally for example
Also offer complimentary health club memberships to policyholders
To encourage healthy living and fewer claims
What is reinsurance?
Where a provider shares some of the risk on a life insurance application with another company, when they feel that cover levels are too high for one life office to absorb on their own
Gives 2 ways lives are categorised in relation to underwriting
Super select lives - individuals meeting high criteria of health and fitness as a result paying lower premiums
Overweight lives - individuals not meeting these standards so pay higher premiums
What is the 2020 Caxton House Statement?
Launched by British Insurance Brokers Association
Non-statutory agreement with aim of improving access to protection insurance for individuals with disabilities and pre existing medical conditions
What should happens if a financial adviser and insurer cannot help a client due to their complex circumstances and medical conditions?
Refer them to a suitable specialist firm
What is free cover?
Free cover relates to employer sponsored plans and means that little or no underwriting takes place
How has the effect of expenses on insurance premiums changed over recent years?
Dramatically reduced
Due to cost savings being made by companies
Insurers have developed telephone based underwriting processes, rather than using time of a qualified underwriter
Processes cheaper reducing costs
How has commoditisation-pricing and the internet affected premiums?
Simple insurance cover viewed more as a commodity- price is most important consideration
Providers therefore need to appear on first page of price comparison websites
More complex financial protection products will require advice so the decision is not solely governed by cost
What will consumers find difficult when purchasing insurance products if going non-advised route?
Deciding which product best suits their needs
Working out required cover level
Establishing wether trusts should be used
How can internet sales be challenging for insurers when selling financial protection?
People understanding the need - this is an area where consumers need to be sold the product rather than just buying it
Even simple cover can lead to compliance or underwriting issues
Without advice consumer can easily be sold wrong policy
