Chapter 4 - Introduction to financial products and customer needs Flashcards

1
Q

What is a means-tested benefit? How could a means-test affect the behaviour of individuals receiving the benefit? What are the main possible types of means-tested benefits? (6)

A

An assessment will be carried out to see if someone qualifies for a particular benefit.

It may act as a financial disincentive to individuals to make alternative private provision.

Retirement pensions
Medical care (proposed NHI in SA)
Income support (unemployment, disability, illness)
Housing support
Child support
Long-term care
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2
Q

Discuss what a benefit scheme is. Give an example.

A

Similar to a pensions scheme in terms of legal and tax structure.

Contribution by members or their employers (could be compulsory)

Healthcare

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3
Q

What is an investment scheme? Give two examples.

A

Individual pays a single/series of payments with expectation that a higher amount will be paid out at a later date.

Unit-linked savings product (many other savings products)
Collective Investment Schemes (CIS)

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4
Q

Explain the principles of insurable interest, risk financing and pooling of risk.

A

Insurable interest

  • Can only insure if individual has financial interest in the insured event
  • Prevent moral hazard, fraud and other crime

Risk financing is pre-funding the risk

  • Put money aside in advance in preparation for the occurrence of an uncertain risk event (in terms of timing, occurrence and cost) in the future.
  • Amount of pre-funding will depend on:
    1) the probability of the risk event
    2) the cost of the risk event
    3) and the return that can be earned on the pre-funded money

Pooling of risk

  • Protect against uncertainties which exist in the cost of financing the benefits
  • Reduce volatility of experience
  • Lead to cost-effective provision of benefits
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5
Q

What is micro-insurance?

A

Insurance products which offer coverage to low-income households.

Offer basic benefits for a low premium. Benefit from pooling large volumes of business.

Tailored specifically for lower valued assets and compensation for illness, injury or death.

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6
Q

Discuss how stakeholders needs can be broken down.

A

Logical needs
- Systematically working out what needs a customer has and fitting products that meet these needs

Emotional needs
- What an individual feels is needed

Current needs
- Need which has an immediate effect on the customer’s circumstances

Future needs

  • Customer’s future aspirations
  • Note a need may be relevant in the present and the future
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