Chapter 11 General Business Environment (1) Flashcards
List the factors in the general business environment which affect a life insurer’s business
DERLF PEP
Distribution channels used and their impact
Economic environment
Regulatory
constraints/opportunities
Legal environment
Fiscal regime
Propensity of consumers to purchase products
Expenses and commission
Professional guidance
Another useful acronym from CA1/ARM
CREATE GREAT LISTS
Useful CA1/ARM list for the external environment within which insurer’s operate
Competition & the underwriting Cycle
Regulation
Environmental & Ethical considerations
Accounting standards
Tax
Economics (interest rates, inflation, economic growth, exchange rates)
Governance (corporate)
Risk management (operational, credit, market)
Experience from overseas
Adequacy of capital and solvency requirements
Trends (demographics
Lifestyle
International practice
Social trends
Technological changes
State benefits
List 4 distribution channels used by life insurance companies
Insurance intermediaries/independent financial advisers
Tied agents
Own sales force
Direct marketing
State 2 main risks to a life insurer if a policy is sold which does not meet agreed policyholder needs
Reputation risk which may affect new business volumes
Persistence risk
consequently financial loss due to withdrawals
Describe insurance intermediaries (5)
How they work (3)
How they are remunerated (2)
Who initiates the sale (1)
Salespeople act interdependently of any insurer
Searches for contract that best meets clients’ situation/needs (premium and benefits)
AKA: independent financial advisers and insurance brokers
Remunerated via
+commission payments from companies whose products they sell
+fee from clients
Sales often client-initiated, however, can also promote themselves e.g. initiating periodic reviews
Describe tied agents
How they work (3)
How they are remunerated (1)
Who initiates the sale (1)
Work solely on behalf of one or several insurers i.e. offer clients only products of those companies
Where tie is to multiple companies, sometimes product ranges are mutual exclusive, but often overlap
Typically employees of bank or other similar financial institution
Remunerated via commission payments or salary plus bonuses by companies to which they’re tied
Sales often client-initiated, but tied agents may actively engage in selling.
Describe an insurer’s own sales force
How they work (1)
How they are remunerated (1)
Who initiates the sale (1)
Usually employees of insurer and only sell products of that company
Remunerated by commission and salary or mixture of both
Usually the salesperson initiates the sale, making use of client lists or purchased leads (however, client my initiate any further sales)
List 4 forms of direct marketing
Internet selling
+useful for without profits contract (simple)
+quote online
+apply online
Press advertising
+short application form
+give telephone number or address
Telephone selling
Mailshots (promotional/advertising letters sent in batches)
State 3 features of life insurance contracts that will be affected by the distribution channel used
Contract design
Contract pricing
Demographic profile
List four Items of insurance customer profile that likely to vary by distribution channel
Financial Sophistication
Income
Mortality Experience
Persist ency Experience
State how the choice of distribution channel can affect contract design
Higher clients’ financial sophistication, greater possible complexity
Products sold via direct marketing may be less complicated than products sold face to face
Insurer using multiple distribution channels may sell different versions of same product, varying by channel
State how choice of distribution channel can affect contract pricing
Underwriting level (4)
Need for competitive pricing of contracts (5)
Other aspects impacting competitive terms (4)
Assumptions (3)
Underwriting performed will be linked to the channel…
This will be reflected in the demographic assumptions used in pricing
Strict underwriting for intermediaries
intermediaries represent client’s best interests, may thus encourage anti-selection
Customers likely high net worth => higher insurance cover
low underwriting: low sum assured; overly complicated underwriting = barrier to entry
Prices need to be competitive but some distribution channels are more competitive than others
Beyond competitiveness via price of contract
+innovative features/attractive options
+complex prods difficult to compare
+savings products compete on investment performance
+competition on customer service/admin support
