Chapter 1 - South African general business environment Flashcards
List the 7 sub-factors in the general business environment regarding writing new business that influences Life insurance companies?
- Regulation
- Tax (policyholder)
- Economic conditions
- Publicity
- Technology
- Target markets
- Micro-insurance
What are the 2 main for a company to grow
- Organic growth - selling business to new clients
- Mergers and acquisition
What areas of a product does regulation affect the new business environment (3)
- product design
- marketing
- commission and regulation of sales force
What are the two main acts that impact the new business environment in insurance?
The Long-term Insurance Act 1998 (as amended) and the Insurance Act (2017)
These acts govern various aspects of insurance business operations.
How many classes of business are detailed in the Insurance Act?
Nine classes of business
A company must have an insurance licence to underwrite a specific type of business.
What does the Long-term Insurance Act impose regarding commission?
Commission restrictions that limit the amount of commission payable
This is designed to regulate the financial practices within the insurance industry.
What factors increase the costs of a life insurance company according to the Insurance Acts? (3)
- Prudential valuation
- regulatory capital requirements
- regulatory reporting requirements
These factors contribute to higher premium rates for policyholders.
What must the Head of the Actuarial Function (HAF) ensure according to the Long-term Insurance Act?
That the premiums, benefits, and other values of a policy are actuarially sound
This requirement is crucial for maintaining the financial stability of insurance products.
Why is it important to define and research the target market before designing a product?
It affects the distribution method and the type of product sold
What is the benefit of partnering with a bank or retailer in rural areas?
Access smaller areas with a large volume of potential customers while keeping costs low
How has new business been affected by poor publicity in the past? (4)
- Poor surrender values
- Brokers promoting living annuities instead of life annuities (lack of disclosure)
- Benefit projections on policy quotations were shown using unrealistically high investment returns
- Financial advisers encouraged policyholders to surrender one policy in favour of another, to the detriment of policyholder value
List the financial instruments impacting the competitive environment for savings products? (6)
Examples of non-life savings products:
* Unit trusts
* Fixed term and call deposits
* Money market accounts
* Exchange traded funds (“closed ended” investment trust of index funds)
* Guaranteed investment in the market
* Direct Investment in the market
What tax advantages do insuranance savings products have over non-life savings products?
- High net worth individuals taxed at lower rate
taxed at rate applied to the Individual Policyholder Fund (IPF) 30%,
likely lower than their marginal rate - Excess E (XSE) position in IPF (for some insuers)
due to relatively low reserves (and hence investment income) compared to expenses
provide tax-free investment income on savings products - Retirement annuities (EET)
Tax-free savings for retirement
Premiums are tax-deductible
Income at retirement is taxable (but now in lower income bracket less tax)
How does operational risks influence life insurers?
- Assessment of Oprisk included in SCR calculation
Require input from all areas of business
If approx. methods inadequate then dedicated oprisk model may be needed - If the risk cannot be mitigated, then capital held to cover the potential cost
Corporate finance and securitisation
List sources of capital for life insurer? (6)
- equity rights issue
- bond & other debt instrument issue
- subordinate debt
- securitisation
- financial reinsurance
- contingent loans
List reason for mergers and acquisitions by insurance companies? (4)
Number of life insurers have reduced because of:
* Increased cost of regulation
* Efficiencies and economies of scale
* Capital requirements not being met due to poor performance
Trend for large insurers to expand into new markets through acquisitions
Describe what are cell captives? (2)
- A mechanism by which companies/individuals (the cell owner) can perform the business of an insurer without obtaining their own insurance license
- An insurer (the cell captive) ‘rents out’ their insurance license to different cell owners in exchange for a fee
Describe regulations for cell captives?
- Same as other insurers except for additional reporting requirements
Potential changes on legislation for:
* Structure
* Restrictions on who may own a third party cell
* Responsibilities of third party cell captive insurers
Wrt governance, risk management, market conduct, reporting, demonstrating financial soundness
Described risks for policyholders of cell captives? (5)
- Risks of equivalent business sold through normal insurance structure
Although concerns:
* Insufficient controls over compliance
* Unfair treatment of policyholders by cell owner
* Conflicts of interest related to the profit share motive inherent in cell captive arrangements
- But, Ring-fencing cells –> cell owners unable to diversify cap requirements across product classes written in other cells –> higher cap requirements than traditional insurance
Describe the risk to shareholders of cell captives? (4)
- Risks of equivalent business sold through normal insurance structure
- Exposure to losses on business written in other cells
- Operational risk relating to functions outsourced to cell owners
- Reputational risk from actions of cell owners associated with the captive
