Chapter 4: Intro to financial products and customer needs Flashcards
What are the 5 categories of product benefits?
a. Benefits on events that are unpredictable - when if ever?
b. Benefit on events that are certain to occur - but when?
c. Benefits for immediate consumption
d. Benefits for events predictable in time
e. Benefits from the accumulation of disposable income and capital
what are the main types of provisions?, give key words, examples and considerations
- Social security
Key words: State provision, level of benefit, means testing (eligibility)
Considerations:
>Incentives? disincentive individuals to make alternative private provisions
> Risk? - subject to political risk that the state may change or withdraw benefits in future
> Who contributes? - Citizens may or may not be required to contribute
Example: RSA- Government hospital, USA: Medicare, Medicaid, Housing, Child support (welfare)
- Financial products: Insurance contracts
Key words: Risk transfer, payment of a premium, event occurrence, reinsurance contracts, derivatives
Considerations:
Definitions? - long-term, contingent on life, third party
>Fraud?
>Disclosure
Example: Life insurance, Car insurance
- Schemes
Key words: Employer, employee benefits, compulsory, voluntary, administered
Considerations: How are these different to insurance products?
Pension schemes, benefit schemes, investment schemes
- Transactions
- Contracts
What are the types of social security benefits that may be offered by the state (5)
a. Retirement pensions including survivor benefits
b. Medical care, NHS UK
c. Income support due to unemployment illness or disability
d. Housing support due to low income
e. Child support
f. Long term care support
What is an insurance contract? (general definition)
> In return for a single premium or series of payments,
> the provider will pay the individual or any heirs an agreed amount or series of amounts that start or on the occurrence of a prespecified event.
> Event may happen to Individual, individual’s property or third party.
What is a reinsurance contract?
Insurance contract for the providers of insurance, which allows for the transfer of direct risk taken onto a third party
What is a pension scheme?
a. A vehicle=> for the accumulation of funds
b. Paid out on a later event=> usually retirement
c. but event may be death or early withdrawal from the pension scheme
What is an investment scheme?
a. A vehicle involving a single payment or series of payments
b. To a provider with the expectation that
c. A higher amount will be paid back at a later date
What is a derivative?
a. Financial instrument whose
b. Value depends on the value of an underlying Investment (e.g. shares, bonds)
c. or variables (interest rates, exchange rates)
What are the three main principles of insurance and pensions that impact the design of financial products and the benefits that they can provide?
a. Insurable interest
> Person taking out an insurance contract must have a financial interest in the insured event
=> prevent moral hazard and fraud
=> and over insurance
b. Pre-funding
> Putting money aside in advance for an uncertain risk event:
> uncertainity : happen at all (fire, flood) , timing (death) and amount (cost).
frequency, cost, return in lag time
c. Pooling of risk
>Protects groups of individuals who pool their finances, against uncertainty in financial costs. Lead to more cost effective provision.
> Economies of scale
> 80-20 principle
> Examples: micro insurance, stokvels
What are financial needs of customers
> Maintaining current lifestyle
Protection
Saving (for a known/unknown purpose)
Debt
Tax efficiency
Life stage dependent
Financial sophistication
What to consider when analyzing customer’s needs
1> Logical or emotional (financial literacy)
2> Current or future needs (trade-off)
3> Attitude to risk - Level of income
4> Vulnerability - TCF, regulation and responsibility
How can logical customer needs be identified?
a. Logical needs
> are determined after careful analysis of customer’s needs and prioritisation followed by fitting products to those needs.
The needs may be identified as:
i. Maintaining current lifestyle
ii. Protection
iii. Accumulation for a purpose known
iv. Accumulation for a purpose as yet unknown
v. May involve taking advantage of tax efficient investment
b. Emotional needs
> identified by considering an individual’s feelings
i. Generate more income in retirement than is actually needed
ii. Avoid guilt of not protecting dependents
iii. wanting more benefit than is needed
What is ‘current’ customer needs?
> has immediate effect on individuals’ circumstances
i.e. Protection against death, loss, illness or accident
What is ‘future’ customer needs?
Relates to customer’s future aspirations (e.g. retire at a certain age)
a. Accumulation for a purpose
b. Accumulation for a purpose as yet unknown=> out of any remaining disposable income
