Chapter 8 The general business environment (1) Flashcards
List the factors in the general business environment which affect a life insurer’s business (8)
Competition & the underwriting Cycle
Regulation
Environmental & Ethical considerations
Accounting standards
Tax
Economics (interest rates, inflation, economic growth, exchange rates)
Governance (corporate)
Risk management (operational, credit, market)
Experience from overseas
Adequacy of capital and solvency requirements
Trends (demographics
Lifestyle
International practice
Social trends
Technological changes
State benefits
List 4 distribution channels used by life insurance companies
Insurance intermediaries/independant financial advisors
Tied agents
Own salesforce
Direct marketing
State 2 main risks to a life insurer if a policy is sold which does not meet agreed policyholder needs
Reputational risk
Persistency risk
consquent financial loss, inculding possibility of compensation
Describe insurance intermediaries (5)
How they work (3)
How they are remunerated (2)
Who initiates the sale (1)
Salespeople act indpendantly of any insurer
Searches for contract that best meets clients’ situation/needs (premium and benefits)
AKA: independant financial advisors and insurance brokers
Remunerated via
commission pmts from companies whose products they sell
fee from clients
Sales often client-initiated, however, can also promote themselves e.g. initiating periodic reviews
Describe tied agents
How they work (3)
How they are remunerated (1)
Who initiates the sale (1)
Work solely on behalf of one or several insurers i.e. offer clients only products of those companies
Where tie is to multiple companies, sometimes product ranges are mutual exclusive, but often overlap
Typically employees of bank or other similar financial institution
Remunerated via commission pmts or salary plus bonuses by companies to which they’re tied
Sales often client-initiated, but tied agents may actively engage in selling.
Describe an insurer’s own salesforce
How they work (1)
How they are remunerated (1)
Who initiates the sale (1)
Usually employees of insurer and only sell products of that company
Remunerated by commission and salary or mixture of both
Usually the salesperson initiates the sale, making use of client lists or purchased leads (however, client my initiate any further sales)
List 4 forms of direct marketing
- Internet selling
useful for without profits contract (simple)
quote online
apply online - Press advertising
short application form
give telephone number or address - Telephone selling
- Mailshots (promotional/advertising letters sent in batches)
State how the choice of distribution channel can affect contract design (3)
Higher clients’ financial sophistication, greater possible complexity
Products sold via direct marketing may be less complicated than products sold face to face
Insurer using multiple distribution channels may sell different versions of same product, varying by channel
State how choice of distribution channel can affect contract pricing
Underwriting level (4)
Need for competitive pricing of contracts (5)
Other aspects impacting competitive terms (4)
Assumptions (3)
- Effect of demographic assumptions through underwriting
underwriting should reflect demographic assumptions used in pricing
strict underwriting for intermediaries
intermediaries reprsent client’s best interests, may thus encourage anti-selection
customers likely high net worth => higher insurance cover
prices need to be competitive
low underwriting: low sum assured; overly complicated underwriting = barrier to entry - Effect of need for competitive terms wrt price of contract
intermediaries recommend most competitive option
other things being equal, commission may be distinguishing factor, if market unregulated, offer more of this
tied agents should not damange good name
products should be reasonably competitive, however there’s no direct comparison (as tied to particular company’s prods)
own salesforce not usually in competitive position
e.g salesperson correctly recommends 15 yr-term assurance, but client may not shop around for better/best deal
direct marketing depends on target market
for financially sophisticated (e. financial paper) terms will need to be compeitive, less so for less financially unsophisticated - Beyond competitiveness via price of contract
innovative features/attractive options
complex prods difficult to compare
savings products compete on investment performance too
compeition on customer service/admin support - withdrawal affected by financial sophistication: customers having buyer’s guilt
unsophisticated customer more likely to do this, as hasn’t done research, or through deliberate mis-selling - Effect on assumptions
e.g mortality and morbidity
