Chapter 9 The general business environment

Question 1

The factors to consider in the General environment

Answer 1

• Propensity to buy (is product bought or sold)
• The regulatory regime
• The tax regime
• Professional guidance
• Economic influences & other influences

Question 2

Propensity to buy vs need to sell

Answer 2

• What makes a policy sell?
• it might be a legal requirement
• the contract outweighs the cost
• person is persuaded they want the contract

-insurers make raise brand awareness

• insurer should go to client and:
• find a receptive client
• finding out about clients healthcare insurance needs
• advising the client about possible products to meet any needs
• helping client to buy product they may now wish to buy.

Question 3

Selling characteristics of different products.

Answer 3

PMI

• If all medical expenses are the responsibility of the individual then PMI products will be bought.
• However if the State provides care then the PMI products will be sold rather than bought.

Question 4

Selling characteristics of Long-term care insurance

Answer 4

• LTCI depends on the perceived attitude of governments to provision of care.
• There are elements of legal compulsion in some countries.

Question 5

Selling characteristics of Critical illness insurance

Answer 5

• CI insurance benefit is not linked to match specific financial need.
• The sum can be used to meet any financial needs(if any) which typically makes it bough/attractive
• It is sometimes sold rather than being bought.

Question 6

Future developments in Healthcare insurance

Answer 6

• There is growing awareness that the State cannot continue to provide wellfare benefits at the same level, given comittments to low taxation & aging population.
• This awareness increases attraction of health and care insurance products.
• Increasing sales regulation & disclosure reduce insurer’s ability to create needs through sales process.

Question 7

The aim of regulation

Answer 7

• Governments may impose restrictions on the way which insurance companies operate.
• The aim is to protect the policyholder.

Question 8

Regulatory restrictions

Answer 8

• The type of contract an insurer can offer.
• restrictions on the premium rates or charges.
• restrictions on the rating factors allowed to be used for premium rates.
• requirements relating to terms and conditions of the contracts offered.
• Restrictions on channels through which insurance may be sold.
• restrictions on ability to underwrite eg using genetic test results.
• An indirect constraint on the amount of business that may written. eg minimum level of reserves.
• restrictions on the type of assets or amount of any particular asset.

Question 9

Regulation on different institutions

Answer 9

• insurance companies are likely to have a monopoly of providing protection benefits not provide savings benefits.
• other organisations may be allowed to offer arrangements can be regarded as competing with health and care insurance products.

Question 10

Effect of regulatory regime on contract design

Answer 10

• companies will want to make use of the best available regulatory opportunities available to them.
• contract design will have to take into consideration of regulatory constraints imposed.

Question 11

The tax regime: Approaches to taxation

Answer 11

• Insurers may be taxed in a number of different ways:
  1. a tax on annual profits of business where profits means excess change in assets over change in liabilities.
  2. tax payable on investment income
  3. tax on premium income

Question 12

The tax regime: The profits approach

Answer 12

• profit could be stated as:
  1. (A1 - A0) - (V1 - V0) profit
  2. (A1 - V1) - (A0 - V0) increase in free assets over the year.

Question 13

The tax regime: The investment income approach

Answer 13

• The taxable amount may include some or all of the capital gains realised, as well as investment income.
• expenses should be allowed for on returns.

Question 14

The tax regime: Tax on different types of insurance business

Answer 14

• different types of insurance business may be taxed differently.
• this means it can be cheaper for the consumer if certain forms of benefits can be offered as one type of business rather than another.
• tax concessions available to policyholders may make sales of certain types of contracts easier.

Question 15

Effect of taxation regime on contract design

Answer 15

• the ability to maximise favourable taxation may force constraints on product design.
• eg tax authorities may be keen that pure savings business should not be dressed up to look like healthcare protection insurance in order to secure favourable tax treatment.
• they may specify minimum level of cover necessary to secure tax concessions.

Question 16

Professional guidance

Answer 16

• actuarial associations will often issue professional guidance to actuaries.
• provide a framework of points they need to consider in carrying out their responsibilities.
• The guidance may typically cover areas such as:
• policy conditions
• adequacy of premium rates for new business
• value of liabilities
• professional guidance may provide interpretation of government regulations.
• this occurs where gov does not want to be overly prescriptive.
• gov may look to actuarial profession to set limits on what would be acceptable.

Question 17

Economic influences

Answer 17

• Inflation
• Business cycle
• Employment security
• Investment returns
• Political stability

Question 18

Economic influences: Inflation

Answer 18

Fixed level benefits
- even if a contract offers fixed benefits the policyholder should be encouraged to increase level of cover and reapply frequently.

Benefits increasing at a fixed escalation rate
- where cover escalates at a fixed rate, policyholder should be encouraged to increase benefits and reapply.

Benefits increasing with national inflation index
- some benefits may increase in line with CPI however the policyholder should still consider increasing care and reapplying.
- there is still a danger because costs of medical care may sometimes increases at greater rate than CPI.

Benefits not fixed but indemnify actual healthcare costs
- where a contract indemnifies the actual cost of healthcare the insurer bears the risk of covering inflation.
- one-year contracts premiums are reviewable annually and can be readjusted.
- on longer-terms business premiums may not be reviewable, insurer will need to keep level of prospective reserves consistent with both current & future expected cost levels.

expense inflation
- actuary will need to reflect rising expenses in the amounts set aside as reserves for future policy outgo.

Question 19

Economic influences: Business cycle

Answer 19

• during business optimism, there is a +ve jump in demand for employer sponsored insurance, to attract best employees retain best staff.
• individual generally upgrade cover on existing policies in bouyant times.
• in times of business downturn employers may be under pressure to cut costs.

Question 20

Economic influences: Employment security

Answer 20

• for individuals, confidence in continuity of remuneration/salary promotes likelihood of insurance purchase.
• for employees covered under employer sponsored schemes they may claim more when there is lack of confidence in longevity of one’s employment or cover.

Question 21

Economic influences: Investment returns

Answer 21

• The returns available are an important aspect for insurance companies.

Question 22

Economic influences: Political stability

Answer 22

• Some political regimes create a more advantageous environment of health & care insurances than others.
• Political stability:
• can indicate national economic wellbeing
• can mean stability of rules governing the insurance industry
• is generally desirable by policyholders as it indicates stability of future economic value of their insurance policies.