Chapter 11

Question 1

True or False? It is a compulsory requirement for consumers to purchase life insurance.

Answer 1

FALSE.

Question 2

Customer tendency to purchase life insurance depends on …

Answer 2

• The natural inclination of consumer to buy
• Power of insurers to sell

Question 3

Why do consumers have a natural tendency to avoid buying life insurance products?

Answer 3

• People are unaware of the need or that the products exist
• Death may be a taboo subject
• It may seem a distant need
• Products and marketplaces are difficult to understand
  
  • Market is very complex with a confusing array of products and providers
  • General need for advice before making LT financial commitments which makes whole process time consuming

Question 4

Life insurance is often described as …

Answer 4

sold not bought.

Question 5

What relationship is there between buyers and sellers in the life insurance market in terms of knowledge and information?

Answer 5

There is an imbalance of power between buyers and sellers in terms of knowledge and information about products, prices and the market (information asymmetry).

Question 6

What is a partial solution to the information asymmetry between buyers and sellers of life insurance?

Answer 6

Intermediaries can advise customers about their needs and which products, and possible companies would best meet their requirements.

Question 7

What is the result of intermediaries providing prospective PHs with appropriate advice?

Answer 7

Persons given proper advice and information will usually recognize any real need for life insurance and would seek to buy.

Question 8

What is the result of insurers failing to sell contracts that meet real consumer needs?

Answer 8

• Persistency/withdrawal risk - high policy withdrawals
• Reputational risk - a bad name
  
  • Reputation affects balance sheet risks through
    
    • Anti-selection - good risks lapse
    • Low NB volumes

Question 9

How can the risk of failing to sell appropriate products to consumers be minimised?

Answer 9

• Sales processes should be clearly documented
• Policy literature should be clearly explained
• Fully professional salespeople

Question 10

What are the main distribution channels?

Answer 10

• Intermediaries/brokers & Independent financial advisors
• Tied agents
• Own sales force
• Direct marketing

Question 11

What is the role of brokers and IFAs?

Answer 11

The select the best products for their client from those available in the market. In a legal sense they act on behalf of the client.

Question 12

How is brokers/IFAs remunerated?

Answer 12

Via commission from companies or fees from clients.

Question 13

Who initiates the sale in the broker/IFA distribution channel?

Answer 13

The client, but intermediaries promote themselves to existing clients by instigating periodic reviews of finances.

Question 14

What is the role of tied agents?

Answer 14

To offer products of only one or of a small number of LICs. They legally work on behalf of the IC, without being an employee.

Question 15

How are tied agents remunerated?

Answer 15

Via commission from ICs.

Question 16

Who initiates the sale in the tied agent distribution channel?

Answer 16

The client, but some tied agents actively engage in selling.

Question 17

What is the role of the own sales force?

Answer 17

They sell products of a particular company directly to the public. Usually employees of that company.

Question 18

How is the own sales force remunerated?

Answer 18

Via commission or salary or a mixture of both.

Question 19

Who initiates the sale in the own sales force distribution channel?

Answer 19

Salesperson. Existing clients can initiate further sales.

Question 20

What are the four main forms of direct marketing and who initiates the sale in each?

Answer 20

• Mailshots - LIC
• Internet selling - either LIC or prospective PH
• Press advertising - Debatable
• Telephone selling - customer

Question 21

Describe the bancassurance model.

Answer 21

• A bancassurer is an IC that is a subsidiary of a bank and whose primary market is the customer base of the bank.
• Relationship between a bank and an IC - aimed at offering insurance products to bank’s customers.

Question 22

Different distribution channels …

Answer 22

reach different types of people.

Question 23

With regards to the customers and the experience, what will be different between the different distribution channels?

Answer 23

The customers may differ in:
* Levels of financial sophistication
* Keenness to take out the contract
* Levels of income

The mortality and withdrawal experience secured through different channels may not be the same.

Question 24

Why will there be differences in the withdrawal experience between the different distribution channels?

Answer 24

Channels differ in their:
* Aggressiveness of selling approach
* Extent to which customer needs and ability to pay are considered
* Who initiates the sale

Question 25

Effectively it is the target market rather than the distribution channel that directly affects levels of income and financial sophistication of customers reached, however ...

Answer 25

it is via the distribution channel that target markets are reached, and certain channels will tend to be associated with particular target markets.

Question 26

What is class selection?

Answer 26

Class selection is where people can be usefully classified by certain socioeconomic attributes (in this case the different distribution channels) that affect their mortality or sickness experience.

Question 27

What relationship is there between financial sophistication and complexity of product design?

Answer 27

Where a channel tends to reach more financially sophisticated target market, more complex product designs are possible.

Question 28

For which distribution channels should the contracts be simple?

Answer 28

Contracts sold through press advertising, telephone selling or the internet.

Question 29

Contract pricing has effects on ...

Answer 29

Demographic assumptions and the need for competitive terms.

Question 30

Describe the effect of contract pricing on demographic assumptions.

Answer 30

* Level of underwriting, which may vary by distribution channel, will affect the experience of the contracts. * Withdrawal rates are likely to be affected by the level of financial sophistication and who initiated the sale. * Above difference in expected experience should be reflected in assumptions used in contract pricing.

Question 31

What is a major reason for withdrawals?

Answer 31

The product is unsuitable for the customer's needs. Unsophisticated customer likely to buy an unsuitable product because they might not be appropriately advised, or it is due to deliberate mis-selling.

Question 32

How does the need for competitive terms vary be distribution channel?

Answer 32

* The importance of competitive terms varies by type of contract. * In some markets, particularly those not well regulated, it may be more important to offer good commission terms than competitive premium rates to secure business.

Question 33

On what does the degree of competition in direct marketing depend?

Answer 33

The financial sophistication of the target market.

Question 34

Why are competitive rates not the ultimate for every product?

Answer 34

* Products may be differentiated from competition through innovative features of attractive options. * More complex products may be difficult to compare across companies. * Some savings contracts may compete as much on past investment performance as on premium rates or charges. * Some products may compete on the level of customer service or admin support.