Chapter 12 - General business environment Flashcards
Outline main types of expenses an insurer may incur in running business
- Commission
+initial, payable on acquisition of new policy
+renewal, payable on premium renewal - Management expenses
Incurred directly for new business written/maintain existing business - Overheads
incurred irrespective of new/in-force business e.g. costs of general management, property
Describe how an insurer may be affected by the economic environment in which it operates.
- Consumers may see insurance products as more/less attractive compared to other investments
- Available asset types/expected returns
influences insurer’s investment choice and
prob of securing pricing return assumed - Volatile investment markets usually => more expensive insurance prods and possibly less take up of them.
Insurers will tend to have relatively higher capital requirements as result of increased uncertainty of investment return - Insurer investing in more risky/speculative markets is likely to seek greater expected return on capital and there’s greater risk of required return not being achieved.
Explain how legal risks may arise for an insurer
- In areas where the insurer has discretion
+Principle of PRE may act unfavourably against the insurer e.g flexibility in bonus method being constrained
legally required to distribute profits in way that is kept consistent with PRE
+Unfair terms voiding clauses contract - Misrepresentation
inconsistency in policy documents and other relevant representations made by company or its agents - Insurance contracts spanning several years
hence open to developing legal cultures, interpretations, court judgements
State main advantages and main disadvantages of life insurance company regulation
Main advantages:
* protection of policyholder interests
* public’s need for confidence
Main disadvantages:
* Cost to policyholder either directly and/or indirectly e.g. through reduced innovation
Impacts contract design
List 8 regulatory restrictions commonly imposed on life insurance companies
- Types of contract that can be offered
- Contract terms and conditions e.g. how surrender values are calculated
- Ability to underwrite e.g. prohibition on use of generic testing/past claims history
- Rating factors that can be used to calculate premiums
- Premium rates/charges
- Sales channels/sales procedures or info given during sale
- Amount of business that maybe written (indirectly) e.g. due to minimum reserving/solvency capital requirements
- Investments e.g. types of assets allowed whether mismatching allowed
Briefly describe 2 common ways of taxing life insurance business
Profits basis
- Tax on annual profits of business, where profits means excess of change in value of assets over change in value of liabilities
- Reserves used will generally be supervisory basis, because limit’s company’s ability to manipulate reserve amt, hence taxable profit
- Focuses on shareholder profit
profit distributed to WP policyholders automatically excluded from profit calc, since they would increase reserves and reduce assets
Investment Income (I - E basis)
- Tax payable on investment income/gains less some or all of operating expenses of company
- In addition, may be tax on premium income
Describe how taxation system can influence product design and sales for life insurance company
Perspective from tax on policyholder and insurer
For policyholder
- Tax treatment in policyholder’s hands can influence buying habits, and attractiveness of life insurance
- tax treatment of premiums paid particularly when premiums are deductible from individual’s taxable income in part/full/not at all.
- tax treatment of eventual policy benefits
For insurer: current tax implications
- Product design make use of opportunities offered
- Tax concessions helps ease sales of certain contract types easier
- Tax treatment impacts life insurance attractiveness
relative to other savings mediums - Taxation risk from changes over time, important to bear in mind when benefits guaranteed over long term
