Chapter 27: Financial product and benefit schemes risks Flashcards
What causes uncertainty and risk in benefit schemes
- The benefits
- The contributions
Risk to the beneficiary in a benefit scheme
- The benefit might be less valuable than required or expected
- The benefits might not be received at the required time
Key risks to the provider in a benefit scheme
- benefit payments might be greater than expected
- payments will be required at an opportune time
examples of benefits that are known in advance
- Defined benefit schemes
- without profit life insurance products
- fixed benefit general insurance policies
what are some of the risks faces for products where the benefit is known in advance ?
B enefit changes
A ssets being illiquid or inadequate
N eeds of beneficiary not being met
What would cause inadequate funds for benefits that are known in advance
- insufficient funds being set aside
- insolvency of the sponsor or the provider of the benefit
- assets that are held not matching the liabilities
- a combination of the above
What would be some of the causes of the benefit not meeting the beneficiary’s needs
- failure to recognise when the benefit promise was made
- inflation eroding the value of the benefits
- beneficiary’s circumstaces changing
some examples of products where the benefit is not known in advance
- unit linked or profit linked life insurance products
- defined contribution schemes
- most general insurance and health insurance products
Risks faced for benefits that are not known in advance
- A dequacy of benefits
- I nvestment and expense risks
- A nnuity risks
- I nflation risk
General benefit risks
- default by sponsor / provider at a time when the funds held are insufficient
- default by sponsor / provider when funds held include loans to the sponsor / provider
- failure by sponsor / provider to pay contributions / premiums in a timely manner
- takeover of the sponsor / provider by an organisation unwilling to continue to meet benefit promises
- decision by the sponsor / provider that future benefits will be reduced
- inadequate communication by the sponsor / provider with beneficiaries, for example relating to the strength of the sponsor / provider, guarantees etc, giving rise to complaints and possible compensation to some beneficiaries and shortfall for others
- general economic mismanagement by a sponsor / provider of assets and liabilities may also lead to a risk of a benefit shortfall.
what is the risk associated with premiums/contributions that are known in advance ?
the risk that they are unaffordable
what would cause the risk that premiums or contributions are not made ?
- poor financial circumstances of the party in question
- party’s cashflow position might be poor and assets cannot be liquidated readily to meet cashflow.
explain the inability to meet premiums that are in real terms
risk that the inflationary index that they are linked to increases at a rate that is higher than expected
Explain the inability to meet premiums that are in monetary terms
there is a risk that the premiums are unable to meet the expected standard of living
What are the risks associated with premiums that are not known in advance?
- A ssets insufficient - the extent to which the value of any assets set aside differs from the expected value of future benefits.
- T akeover risk
- G uarantees (cost)
- L iquidity risk
- U ncertain level of future benefits or premiums
- E xcessive contributions required - insolvecy of the sponsor
