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
