Chapter 1: (3 Exam Questions) Financial Protection Market Factors and Trends. 2023-24

Question 1

Risks are usually categorised in two ways which are:

1) The level and severity of impact.

2) The likelihood of occurrence.

Answer 1

1) The level and severity of impact - the impact on the individual once the risk occurs. There are different levels. For example, your house catching fire will have a higher level and severity of impact than of a single wall in the house collapsing

2)

Question 2

The different levels of risk are as followed.

Tell me about each:

Question 3

What is the risk matrix?

Answer 3

It broadly outlines the different types of risk. The an individual may insure themselves against any form of these risks if they feel it is necessary

A ‘high frequency high impact’ risk could be something like periods of unemployment that are common in certain occupations, such as acting and so on

Risks falling into the ‘high-impact, low-frequency’ section are the ones most likely to benefit from insurance. For example: serious illness during your working life. This is very rare (hence low frequency) but will likely have a major impact (hence high impact)

Question 4

Life assurance transfers the risk from you to a group of individuals, known as a mortality pool

Explain what this means

Answer 4

Insurance are typically collective arrangements meaning the risk is ‘pooled’. This provides a cost effective way to be insured and guarantees that the funds are available if the policyholder needs to claim

Question 5

What is mortality risk?

What is morbidity risk?

Answer 5

Question 6

Answer 6

Question 7

QUESTION

Answer 7

Question 8

What is price elasticity in relation to insurance?

Answer 8

How expensive insurance products are obviously dictates how many products are taken out

Price elasticity is the name for the direct relationship between insurance costs and insurance sales. Ie, the less expensive it is, the more sales there are… and vice versa

Question 9

How does the housing market directly influence the number of insurance sales?

Answer 9

A fall in demand for property (for example during high interest rate environments) results in less insurance sales as less people need house insurance,

and vice versa…

Question 10

QUESTION

Answer 10

Life assurance transfers the risk from you to a group of individuals, known as a mortality pool.

Question 11

Even following the retail distribution review, protection advice and product recommendation is still one area where commission can still be charged

True or false

Answer 11

True

Question 12

Question

Answer 12

Question 13

Insurers cannot charge different premiums for men and women.

True or false

Answer 13

True

REMEMBER: NOW PREMIUMS MUST BE GENDER NEUTRAL

However, In the past women paid higher for morbidity risk related insurance (because statistically they were more likely to fall ill) and men paid higher for mortality risk related insurance (because statistically they were more likely to die)

The EU Gender Directive changed this so now there is no difference in cost simply because of gender

Question 14

Virtually all insurance companies offer products on smoker and non-smoker terms.

True or false

Answer 14

True

This is because it has been statistically proven that smokers are higher risk than non smokers

Question 15

What are preferred-life policies?

Answer 15

Where an insurance company offers substantial discounts on premiums to individuals who can prove a high level of fitness. For example, the company vitality

Question 16

What is reinsurance?

Answer 16

Insurance for insurance providers

where a provider ‘shares’ some of the risk on a life assurance application with another company, when they feel that cover levels are too high for one life office to absorb on their own.

Question 17

What is the Caxton House Statement ?

Answer 17

A non-statutory (not required by law) agreement with the aim of improving access to protection insurance for individuals with disabilities and pre-existing medical conditions.

What this means is, if a financial adviser and the insurer cannot help a client due to their complex circumstances and medical conditions, they will refer them to a suitable specialist firm.

Question 18

What is ‘free cover’ in relation to insurance?

Answer 18

Free cover relates to employer sponsored plans. It means that little or no underwriting takes place.

Question 19

Answer 19

For example: lives are now being categorised in different ways in relation to underwriting, which are:

Super select lives -
These individuals will be categorised as meeting high criteria in terms of health and fitness and as a result will pay lower premiums.

Overweight lives
These individuals do not meet such standards so, as a result, will pay higher premiums.

Question 20

Answer 20

Question 21

Why do consumers need financial protection and how are risks assessed?

Answer 21

Insurance protects the consumer against several risks.

When assessing risk we should consider the:
Level and severity of impact
Likelihood of occurrence

High impact, low frequency risks are most commonly covered by insurance.

Question 23

Preferred-life policies differentiate between high and low risk candidates.

true or false

Answer 23

True

Question 24

What is commoditisation in relation to insurance?

Answer 24

Commoditisation is treating the purchase of a financial protection policy as a commodity. They are bought via the internet on a comparison site .They are treated as a commodity because the product’s characteristics are indistinguishable from other comparable products in the eyes of consumers. Therefore, they are seen as generic items that can be easily swapped or replaced with similar products from different providers. IT IS NO DIFFERENT FOR ME WHEN BUYING CAR INSURANCE THROUGH A COMPARISON SITE - I PRACTICALLY SEE ALL THE PRODUCTS AS THE SAME THING SO I FOCUS MAINLY ON THE COST, PROVIDER AND WHAT THE PRODUCT OFFERS TO MAKE MY CHOICE

Price is normally the most important consideration for consumers as well as what conditions are covered and the provider’s reputation ( remember this )

It applies to simpler policy types, such as term assurance. More complex financial protection products, such as critical illness or long-term care, will require advice from a suitably qualified individual

Providers of commoditised insurance products aim to get their product appear on the first page of comparison websites where the factors that affect ranking are the conditions covered, premium costs, and provider reputation.

Question 25

What are the main factors that consumers take into account when purchasing a commoditised insurance products

Answer 25

Conditions covered, premium costs, and provider reputation.

Policy Features are not taken into account…

Commoditisation relates to buying protection products as a commodity via the internet. Insurers need their product to appear on the first or second page of a comparison website as applicants are unlikely to look any further when looking to buy. Policy features are least likely to affect this.

Question 26

What happens to the demand for protection when inflation increases?

There is no change in demand.

The demand increases, as prices decrease in real terms.

The demand decreases, simply because the protection becomes too costly.

The demand decreases, as it becomes too costly, and its value is eroded.

Answer 26

The demand decreases, as it becomes too costly, and its value is eroded.

When inflation goes up the value of protection cover is eroded. This makes it appear less valuable and more expensive to consumers.

Question 27

Janice has a policy that mitigates mortality risk, Ravindra’s mitigates morbidity risk. Which of the following statements are TRUE?

Janice has income protection insurance, Ravindra level term assurance.

Janice has critical illness cover, Ravindra an endowment policy.

Ravindra has income protection insurance, Janice an endowment policy.

Ravindra has a whole life plan, Janice an endowment policy.

Answer 27

Ravindra has income protection insurance, Janice an endowment policy.

Morbidity is the risk of illness. Mortality is the risk of death. Ravindra must therefore have income protection insurance, Janice an endowment policy.

Question 27

The most common risk mitigated by insurance is…

high-impact, low-frequency.

high-frequency, high-impact.

high-frequency, low-impact.

low-impact, low-frequency.

Answer 27

high-impact, low-frequency.

High impact low frequency risks are the ones that most benefit from insurance cover.

Question 28

Life assurance technically mitigates personal financial risk by…

providing a means for the individual to cover the risk through investing.

providing a means for the individual to cover the risk through saving.

transferring the risk from an individual to a group of individuals.

transferring the risk from an individual to a limited company.

Answer 28

transferring the risk from an individual to a group of individuals.

Life assurance is an example of where risks are pooled. This has the effect of transferring the risk from an individual to a group.

Question 29

Which of the following factors can encourage an individual to purchase a protection policy?

An increase in income only.

An increase in housing market activity only.

Changes in the UK economy and inflation only.

Increases in both income and the housing market.

Answer 29

Increases in both income and the housing market.

FOR EXAMS: It is usually a good idea to avoid answers with the word ‘only’ in them. Financial services are still full of grey areas in some cases. The best answer is the one without this word, that also gives you two factors in one option.

housing market = more house purchases = more insurance
income = insurance more affordable = more insurance purchases

Question 30

Which of the following would be least likely to impact on commoditisation?

Policy Features.

Conditions Covered.

Providers.

Premiums.

Answer 30

Policy Features.

Commoditisation relates to buying protection products as a commodity via the internet. Insurers need their product to appear on the first or second page of a comparison website as applicants are unlikely to look any further when looking to buy. Policy features are least likely to affect this.