Chapter 12 - The general business environment (2)

Question 1

What are the restrictions government may impose on life insurance companies

Answer 1

TIPCART F

• a restriction on the TYPES of contract that a life insurance company can offer
• an INDIRECT constraint on the amount of business that may be written (there are regulations on the minimum level of reserves that must be held, which affects the amount of capital available within a company to write business)
• restrictions on the PREMIUM rates, or charges, that can be used for some types of contract
• restrictions on the CHANNELS through which life insurance may be sold or requirements as to the procedures to be followed or the information required to be given as part of the selling process
• restrictions on the ABILITY to underwrite, eg. to differentiate between classes of policyholder
• restriction on the RATING factors that can be used to calculate premiums, eg. Gender
• requirements to the TERMS and conditions of the contracts offered, eg. How surrender values are calculated
• the regulatory FRAMEWORK within a country may limit what a company would like to do in terms of investment. There may be restrictions on:

MET MECCA

• a requirement to MATCH assets and liabilities by currency
• restrictions on the maximum EXPOSURE to a single counterparty
• restrictions on the TYPES of assets the provider can invest in
• a requirement to hold a MISMATCHING reserve
• a limit to the EXTENT to which mismatching is allowed
• CUSTODIANSHIP of assets
• a requirement to hold a CERTAIN proportion of total assets in a particular class
• restrictions on the AMOUNT of any one asset used to demonstrate solvency may be restricted

Question 2

What are the ways in which a life insurer can be taxed

Answer 2

• a tax on the annual profits of the business, where broadly profits means the excess of the change in the value of assets over the change in the value of liabilities
• Tax payable on investment income less some or all of the operating expenses of the company
• Tax on premiums

Question 3

The overall attractiveness of a life insurance product compared with other products depends on a combination of

Answer 3

• The taxation treatment of premiums paid, whether its tax deductible in full or part from the individual’s income
• the taxation of the life insurer’s fund during the life of the contract
• the taxation treatment of the eventual policy benefits

Question 4

What are the possible effects of restrictions on life companies

Answer 4

• Restricting innovation
• Reducing the benefits that could have otherwise be given to policyholders