Chapter 1 - South African General Business Environment

Question 1

2 main ways for companies to grow:

Answer 1

1. Organic growth - selling business to new clients
2. Mergers or acquisition

Question 2

Regulation affects: (3)

Answer 2

1. Product design
2. Marketing
3. Commission and regulation of sales

Question 3

Advantages of insurance products over non-insurance equivalents: (3)

Answer 3

1. High net worth individuals have advantages of being taxes at rate applicable to IPG, likely lower than their marginal rate
2. Some companies have excess E position in their IPF, due to relatively low reserves (hence low investment income) compared to expenses. Means that they can provide tax free investment income on savings products
3. RAs allows PH to save tax free from retirement. RA prms are tax deductible (up to certain level)
   Although income purchased with RA are taxable, portion can be taken as a tax free lump sum at retirement

Question 4

Why IC have higher expenses than non-insurers: (3)

Answer 4

1. Need to hold regulatory reserves and capital
2. Training and regulation of sales force. Although there are FAIS requirements for non-insurers
3. Additional regulatory requirements (eg HAF to review premium rates)

Question 5

Examples of non-life savings options: (6)

Answer 5

1. Unit trusts
2. Fixed term and call deposito
3. Money market accounts
4. Exchange tragedie funds
5. Guarantee investment products
6. Direct investment in the market

Question 6

Operational risk can include: (7)

Answer 6

1. Product mis-selling
2. Mis-pricing
3. Administrative errors
4. IT failure
5. Data issues
6. Poor standards of policy service (can lead to reducing new business, regulatory fines)
7. Staff retention

Question 7

What is securitisation?

Answer 7

Refers to the sale of future profits expected on in-force business.

Purchaser of security will receive repayment of the capital and interest on the nominal value of the security only if sufficient profit emerges from a specified Block of business

Question 8

Other forms of raising finance against expected future profits of in force business: (3)

Answer 8

1. Financial reinsurance
2. Contingent loan
3. Subrdinate debt

Question 9

Consolidation of life insurers has been driven by: (3)

Answer 9

1. Increased cost of regulation
2. More focus on efficiencies and economies of scale
3. Life insurers not meeting capital requirements due to poor performance

Question 10

How life insurers can demutualise: (2)

Answer 10

1. They can be acquired by another life insurer
2. Through flotation on the stock market

Question 11

Challenge for cell captive insurers: (4)

Answer 11

1. Need to ensure that 3rd party cell owners abide by relevant regulations incl FAIS Act, Insurance Act, Long-Term Insurance Act
2. Solvency position of each cell structure needs to be monitored to ensure that remedial action can be taken when necessary
3. Cell captive insurer needs to decide on how to allow for drink diversification benefits across cell structures when calculating regulatory and internal capital, and fully understand the potential implications of any allowance for diversification for the cell owners (i most arrangements diversification is not allowed)
4. Tax calcs are done at cmpy level and ignore internal division if cmpy into cell. To ensure equity between cells, may need to performed independent tax calculations for each cell structure