Chapter 4 - introduction to financial products and consumer needs Flashcards
What are the 5 ways to categorize benefits?
- benefits on events that are unpredictable
- benefits on events certain to occur but unpredictable in time
- benefits for immediate consumption
-benefits on events predictable in time
-benefits from the accumulation of disposable income and capital
how do social security benefits vary between states?
- vary in the type of benefit provided
- vary in the amount of benefit provided
- vary in whether they are means -tested or not
what are the main possible events offered?
- retirement pensions
- medical care
- income support due to illness, disability, unemployment
- household support due to low income
- child support
- long-term care
What is an insurance contract?
in return for a single payment (or series of payments), a provider will pay an individual or heirs an amount (series of amounts) on the occurrence of a pre-specified event. Happen to an individual, individual’s property or a third party
Outline the needs of customers that may be met by pension schemes.
- to accumulate assets to provide an income in retirement
- increase this income in real terms n order to maintain a standard of living
- provide protection against the financial impact of the death of an individual both before and after retirement
- to accumulate assets for other reasons (lump sum on retirement to pay off mortgage)
how could the medical costs for healthcare benefits be paid?
- on a fee-for-service basis
-capped amount according to a fixed tariff schedule - fixed amount irrespective of the cost or type of health event
what is an investment scheme?
involves 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
what is microinsurance?
-insurance products that offer cover to low-income households
- provides protection to individuals with little savings
- tailored to lower value assets and compensation for illness, death, injury
Outline and describe the three principles of insurance
Insurable interest
- individual must have a financial interest in the insured event
- prevent moral hazard, fraud, and other crime
- individuals assumed to have an unlimited financial interest in their lives and dependents, but have limited financial interest in other events to reduce over-insurance
Pre-funding for risk
- putting money aside in advance of the occurrence of an uncertain risk event
uncertainty relates to
- whether the event will happen
-timing of an uncertain event
- how much it will cost
how much money is needed depends on
- probability of risk occurring
- amount the risk will cost
- returns that can be earned on the pre-funded amounts
Pooling of risk
- individuals group together and pool their finances
- help protect the individual against some of the uncertainties that may exist in financing the benefits
- cost-effective due to economies of scale
discuss the different attitudes to risk
Risk averse
- prefer protection against future events c=for an immediate cost
- individuals without access
risk seeking
- prepared to accept the risk from infrequent events
- generally those with capital
- will use money saved to enhance current lifestyle
discuss the differences between logical and emotional needs
logical needs
- approach to systematically and carefully working out the needs of a customer and fitting products to fit these needs
1. establish needs
2. analyse the needs
3. prioritise needs
4. fit products
logical needs:
- maintain current standard of living
- protection e.g. death, illness, loss
- accumulation for known purpose
-accumulation for unknown purpose
Emotional needs
- relating to wanting benefits that are not needed
- bequest motive
- fancy funerals
- lavish lifestyle after retirement
- feel the need to generate excess income in retirement from investment capital
a charity is being established to raise funds for a range of community groups within a small town. the charity will have a board of trustees and will run fundraising events throughout the year. Describe the types of insurance covers that would be suitable for the charity.
Trustee/professional indemnity insurance – covers the legal costs and expenses of
defending against disqualification as a trustee, investigations or extradition proceedings; protecting the trustee’s personal wealth.
Fidelity guarantee insurance –covers against financial losses caused by dishonest actions by its employees or volunteers e.g. due to fraud or embezzlement.
Public liability insurance – covers the cost of defending the charity if someone is injured, or their property damaged, due to alleged negligence.
Employer’s liability insurance – if the charity employs staff or volunteers. It covers against allegations of injury or illness suffered by staff during their employment.
Property damage insurance – covers the charity’s buildings, general contents (including stock), computer equipment, etc. against damage; and against theft.
Event cancellation insurance (or business interruption) – provides insurance against the costs incurred where an event has to be cancelled.
Keyman cover – to provide cash in case of death/incapacity of key individuals so the
charity can recruit alternative.
sate the ideal criteria to be met before an insurance company is willing to provide insurance protection
Individual risk events should be independent of each other.
The probability of the event should be relatively small.
Large numbers of potentially similar risks should be pooled.
So as to reduce the variance and hence achieve more certainty.
There should be an ultimate limit on the liability undertaken by the insurer.
Moral hazards should be eliminated as far as possible.
There should be sufficient existing statistical data/information to enable the insurer to estimate the extent of the risk and its likelihood of occurrence (price or underwrite the risk).
