Chapter 12 General Business Environment (2)

Question 1

Describe how an insurer may be affected by the economic environment in which it operates.

Answer 1

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.

Question 2

Outline main types of expenses an insurer may incur in running business

Answer 2

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

Question 3

State 2 main risks with regard to expenses

Answer 3

Profitability risk
+loading insufficient to meet actual expenses incurred

Risk that company cannot control costs
+poor management
+inflation

Question 4

Explain how legal risks may arise for an insurer

Answer 4

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

Question 5

State main advantages and main disadvantages of life insurance company regulation

Answer 5

Main advantages:
+protection of policyholder interests

+public need confidence

Main disadvantages:
+Cost to policyholder either directly and/or indirectly e.g. through reduced innovation
Impacts contract design

Question 6

List 8 regulatory restrictions commonly imposed on life insurance companies

Answer 6

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

Question 7

List direct and indirect ways in which regulatory framework might affect insurer’s choice of investments

Answer 7

Direct, restrictions on
+types of assets company can invest in
+amount of any particular asset admissible for solvency
+extent to which mismatching is allowed at all

Indirect
+Certain assets may allow use of higher discount rate in statutory valuation of liabilities and so reduce value of liabilities
+May be regulatory requirement to allow for mismatching reserve

Question 8

Briefly describe 2 common ways of taxing life insurance business

Answer 8

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

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

Question 9

Describe how taxation system can influence product design and sales for life insurance company

Answer 9

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

Question 10

Briefly discuss the impact of professional guidance on products which life insurers choose to sell

Answer 10

Actuarial associations often issue professional guidance for actuaries advising life insurers

Provides framework to consider when carrying out responsibilities to maintain professional standards

Not intended to restrict actions of actuary

Guides interpretation of government regulation

Adds safeguards

Ensures consistency

Generate consumer confidence