Chapter 2 External Environment Flashcards
Legislation vs Regulation
Legislation is law declared by the government and regulation is used to implement legislation
2 Examples of compulsory insurance
- Employers’ liability insurance
2. Motor third party liability insurance
Explain state benefit as an external environment
- State provides benefits, however, usually low, just to keep citizens out of poverty
- Take into account the benefits provided by the state when conducting financial planning, e.g.
- Individuals might need to provide less for themselves, e.g. employer sponsors half of health insurance
- No saving incentives, saving might not be worth individuals collecting state benefits
List four examples of how benefits from financial products and schemes can be taxed
- Some benefits are tax-free
- Excess of benefits received over contributions can be taxed as income or capital
- Benefits can be entirely taxed as income
- A portion of the benefits can be tax-free, with the balance being taxed
Explain how items other than benefits can be taxed
- Contributions
- Accumulating returns
- Inheritance
Contributions:
* Some financial products might give tax relief to contributions but then tax the benefits. Others might be paid from taxed income then the benefit is taxed
Accumulating returns:
* Income and gains may be taxed during the accumulation phase, normally coupled with no tax on the policyholder’s gains.
Inheritance:
* Insurance can be available to cover this tax liability.
Define corporate governance and who manages it in SA
High-level framework on how a company’s managerial decisions are made. Managed by King IV
Aim of corporate governance; and how is it achieved (3)
Managed efficiently to meet the requirements of stakeholders. The regulator is concerned with not making own-interest decisions but stakeholder-interest decisions.
This is achieved through remuneration and shareholder options.
Can also appoint non-executive directors which gives an impartial view and sets remuniration
Explain what a mutual society is
Mutual society has no shareholders and profit belong to policyholders.
No shareholders mean:
- They provide the same benefits, but are cheaper because the dividends don’t have to be paid or distribute profits to policyholders
- Finance also cannot be raised through the public.
Example: Medical schemes and mutual banks
Explain what a proprietary is
- Can benefit from the capital market, which results in economies of scale.
- They have more dynamic management and they do have shareholders (pay dividends)
- Larger can benefit from economies of scale and better management
- Benefits of closeness of owners
Describe the underwriting cycle
Profitability in the various insurance classes tend to go in cycles, driven by market forces of supply and demand combined with actual claims experience and economic climate.
When business is profitable, more insurers enter the market. Premium rates reduce as insurers compete for market share.
This leads to reduced profits or to losses, loss of business and reduced solvency, and the cycle goes into depression. The position may be accentuated by catastrophes or by the economic climate.
At the bottom of the cycle, insurers leave the market or reduce their involvement in the classes concerned. Eventually, premium rates increase to cover the losses being incurred and in the light of emerging experience.
Effects of an ageing population (4)
- Older people tend to spend less and save more. This leads to lower interest rates and deflationary pressures on the economy.
- Some pay as you go State pension schemes are becoming unsustainable as the income received from the working population falls short of that needed to pay the retired population
- Increasing costs of healthcare systems lead to either higher levels of tax to be paid or reduced healthcare provision by the state
- The cost per capita of educating the population will tend to fall
What is a pay as you go pension
Active members fund the pension of current members
Explain the concept of emissions trading
This is a market based approach to address pollution, with the aim of minimizing the cost of meeting an emissions target set by the government.
The government issues permits to emit up to the overall limit. Permits are sold or are equal to historical trading emissions for each polluter. A participant can use permits exactly, or emit less and sell the excess permits, or emit more and buy permits from other polluters.
The usual aim is for the government to lower the overall limit over time.
Give four examples of changing social and cultural trends
- Increased home ownership increases the demand for mortgages
- Cuts in state healthcare increases the demand for private health insurance
- Increasing prosperity increases the demand for savings products
- Increased use of telematics for motor insurance, in many countries, allows the risk factors of the individual, the policyholder’s driving behavior and other factors to be monitored through a device installed in the insured vehicle or a smart phone app
Give 6 examples of technological advances that can have an impact on the availability of financial products, schemes, contracts and transactions
- Internet quotation and sales
- Price comparison websites
- Banking over the internet and phone
- Social media for advertising and links to sales/enquiry websites
- Insurance companies increasingly using websites to capture customer enquiries and register claims and transactions
- Email as a fully accepted and widely used means of communication
List the factors to consider in relation to the external environment
CREATE GRAND LISTS
Corporate structure Regulation and legislation Environmental issues and climate change Accounting standards Tax Economic outlook
Governance Risk management requirements Adequacy of capital and solvency New business environment Demographic trends
Lifestyle considerations International practice State benefits Technology Social and cultural trends
Explain why CORPORATE STRUCTURE is an external environmental factor
Mutual or Proprietary? Invoice how a company can obtain funding and what they should do with their profits
Explain why REGULATION AND LEGISLATION is an external environmental factor
Regulation can make:
- Certain insurance is compulsory
- Employers should provide pension benefits to employees
- Can influence products most suited to a customers needs, regulate level of charges applies to certain schemes
- Disclose requirements when products are sold, thus detering complicated products
Explain why ENVIRONMENTAL ISSUES & CLIMATE CHANGE is an external environmental factor
- Rapid changes in the environment can cause future risks, does however create both positive and negative economic risk. Oil companies do less well, while producers of batteries for electric cars do better.
- Urbanisation leads to overcrowding, poor sanitation and diseases -> outbreak of cholera.
- Many cities are on coast lines, increasing level of exposed to risk of rasing sea levels and extreme weather events.
- This leads to reputation risk on how insurance companies deal with all of this
Explain why ACCOUNTING STANDARDS are an external environmental factor
The way benefits are reported influence the type of benefits that a provider is willing to offer
Explain why TAX is an external environmental factor
Tax treatment influence individuals actions
Infuence design of products
Products designed to meet inheritance tax liability, e.g. whole life assurance
Explain why ECONOMIC OUTLOOK is an external environmental factor
General economic environment influences the demand for products. E.g., in times of recession, some is seen as a luxury and are reduced
Explain why GOVERNANCE is an external environmental factor
- Ensure the company is managed in the interest of all stakeholders.
- One way to achieve this remuneration schemes for employees meeting the governance goals of the company
- Non-executive directors to provide impartial direction
Explain why RISK MANAGEMENT is an external environmental factor
Can be regulatory requirement to measure, monitor and control risks
Explain why ADEQUACY OF CAPITAL AND SOLVENCY is an external environmental factor
Minimum level of capital to meet liabilities based on risk of the organisation
Explain why NEW BUSINESS ENVIRONMENT is an external environmental factor
Level of underwriting / economic interest rate -> think of underwriting cycle
Explain why DEMOGRAPHIC TRENDS are an external environmental factor
Aging populations
Climate change also influences, mass migration following flooding which can also increase mortality and morbidity
Explain why LIFESTYLE CONSIDERATIONS is an external environmental factor
Young -> Higher demand for loans and mortgages
With dependants -> Life insurance to protect
Older -> Less saving and more spending, e.g., buying whole life annuity to ensure not running out of money
Explain why INTERNATIONAL PRACTICE is an external environmental factor
Give ideas about what other countries are doing, however, different legislation and tax makes it difficult
Explain why STATE BENEFITS is an external environmental factor
Level and quality of state benefits offered influence demand, reduced need for self-provision.
Can discourage saving -> means-testing to be eligible
Explain why TECHNOLOGY is an external environmental factor
Influence how products are sold, e.g., many insurance products are sold through price comparison websites, excluding the need for an intermediary to find the best product.
Use of websites to capture claims
Improve healthcare
