Chapter 4: Introduction to financial products & Customer needs Flashcards
Name and explain the broad categories of benefits
Give an example of each
- Predictatble - Benefits on events that are predictable in time - Retirement benefits
- Unpredictable - Benefits that are unpredictable, both in timing and whether they will occur - benefits on natural disasters
- Time - Benefits that are certain to occur, but unpredictable in time - Death
- Accumulations - Benefits on the accumulation of funds and capital - Pensions
- Immediate - Benefits for immediate consumption
State the types of provision
Give an exmple of each
- Social security – SASSA, UIF
- Schemes – medical aid, pensions
- Transactions – Bank deposits
- Financial products – Unit trust
- Contracts – Insurance
What is a means test
What can it be based on
An assessment to determine eligibility for benefits. Can be based on:
* The Income that a person earns
* The assets of a person
* Can be both
What is political risk?
The state might change or withdraw state benefits in the future
Give examples of state benefits
- Medical care
- Housing support
- Income support
- Child support
- Retirement pensions
- Long-term care support
Describe insurance products
- In return for a single payment (or series of payments)
- the provider pays an agreed amount(or series of amount)
- that start or end on the occurence of a pre-specified event
- The event may happen to an individual, the individual’s property or 3rd party
Describe reinsurance products
- An insurer might not want to take on all the risk it accepted from its policyholders
- And thus cedes some of them to an reinsurer
- And pays the reinsurer an agreed premium
Describe pension products
A pension involves an accumulation of funds, which are paid off at a later event. The event can be
* Death
* Retirement
* Withdrawal
Describe benefit schemes
Similar to pension schemes in tax and legal structure, but may procide a different type of benefit. Example:
* Medical
* Unemployment
* Disability
Contributions are made by memebers and may be compulsory (UIF)
Describe Investment schemes
An individual pays a payment or series of payments with the expectation of a higher amount at a future date
Describe derivatives
- A financial asset that derives its value from another financial asset
- Can be used to pass risk to a 3rd party
Name the principles of insurance and pensions that impact the design of products and benefits
- Risk pooling
- pre-funding of the risk
- The existence of an insurable interest
Explain what is an insurable interest
- In many countries, a risk is only insurable if the insured has financial interest in the insurance – excess is an example
- This is done to prevent moral hazard (define it ), fraud or some other crime
- Individuals are assumed to have financial interests in their own lives and their dependents’ lives
Explain pre-funding
- Individuals or corporate bodies need to set money aside in advance for an uncertain event
- Takes into account the traditional: Prob x Amount x timing
The individual will also have a risk tolerance – how comfortable they are with the probability of their desired outcome not occurring
Describe pooling of risk
- Individuals may pool their finances
- Lead to more cost effective provision than for each individual making their own provisions
Describe retirement communities
- Example of pooling of risk
o Trade union
o Employee association
o Community or religious association
What is microinsurance
Insurance products that offer coverage to low income households
Usually provides basic benefits at a low premium
Describe ways to establish a customers’ needs
Logical – Systematically and carefully working out what needs a customer has and fitting products to these needs.
Emotional – More on what the individual feels is needed
Give the name and steps to the logical approach
Called fact find (PEBA)
* Establishing a customers needs
* Analysing them
* Prioritising them
* Fitting the benefits provided for those needs
Differentiate between a current need and a future need
Current need – Has an immediate effect on the customer’s circumstances
Future need – Relates to a customers’ future aspiration
What is a vulnerable consumer
Someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when the firm is not acting with appropriate levels of care
State situations that vulnerability can arise from
- H ealth status poor
- I ncome low
- S ecurity (financial) limited due to low earnings and low savings
- A cess to advice (limited)
- F inacial knowledge limited
- E ducation levels low
