Chapter 4: Intro to financial products and customer needs

Question 1

Benefits can be categorised as (5)

Answer 1

• benefits on events unpredictable in time (death)
• benefits on events unpredictable
• benefits on events predictable in time (retirement)
• benefits for immediate consumption
• benefits from the accumulation of disposable income and capital

Question 2

5 Financial product categories

Answer 2

• insurance contracts
• reinsurance contracts
• pension schemes
• benefit schemes
• investment schemes
• derivatives

Question 3

Insurance contracts

Answer 3

In return for a single payment (or series of payments) the provider will pay an individual or his/her heirs an agreed amount that starts or ends on a pre-specified event.
This event may happen to the individual, the individual’s property or a 3rd party.

Question 4

Pension scheme

Answer 4

Involves accumulation of funds paid out on a later date, for example, retirement, death or withdrawal from the scheme.

Question 5

Investment schemes

Answer 5

Involve an individual paying a single payment or series of payments to a provider with the expectation that a higher amount will be paid back at a later date.

Question 6

Derivative

Answer 6

A financial instrument whose value depends on the value of other investments or variables.
Can be used by providers of financial products to pass on risks to 3rd parties.

Question 7

Types of needs to differentiate for customers

Answer 7

• logical and emotional needs

- Current and future needs

Question 8

3 classifications of a customer’s logical needs

Answer 8

• maintaining a current lifestyle
• protection,
• accumulation for a purpose
• accumulation for a purpose as yet unknown out of any remaining disposable income or capital

Question 9

Emotional needs

Answer 9

The result of what a customer thinks is needed or wants

Question 10

Current need

Answer 10

One triggered by an event that has an immediate effect on a customer’s circumstances,

Question 11

Future need

Answer 11

May be one that relates to a customer’s future aspirations.

Question 12

Types of provision

Answer 12

• social security (state-provided)
• financial products
• contracts
• schemes
• transactions

Question 13

3 main principles of insurance and pensions

Answer 13

• Insurable interest (to prevent moral hazard, fraud and other crimes)
• Pre-funding (prob that the risk occur, cost of the risk event and the returns that can be earned on pre-funding before the event occurs)
• The pooling of risk (more cost-effective provision)

Question 14

microinsurance

Answer 14

insurance products that offer coverage to low-income households