Chapter 9: The general business environment

Question 1

List the main aims of financial regulation

Answer 1

protect consumers of financial services
prevent financial crimes
address information asymmetries
ensure confidence in the system
correct perceived market inefficiencies and to promote efficient and orderly markets

Question 2

List 8 common regulatory restrictions

Answer 2

restrictions on thetypes of contracts that can be offered
restrictions on thepremium rates or charges
restrictions on therating factors used to determine premiums
restrictions on theterms and conditions
restrictions on the distributionchannels used/procedures to be followed or information given as part of the selling process
restrictions on theability to underwrite
anindirect constraint on the amount of business that may be written, via minimum reserving or solvency capital requirements
restrictions on asset types or amount of any particular asset considered for the purpose of demonstrating solvency

Question 3

Describe the direct costs associated with regulation

Answer 3

developing the regulation:
time, cost of experts hired

administering the regulation:
collecting and maintaining records

ensuring compliance with regulation:
investigating suspected breaches and imposing sanctions

these costs are likely to be borne by the policyholder

Question 4

Describe the indirect costs associated with regulation

Answer 4

reduced competition:
market participants may decline if regulation too onerous

reduced innovation/ restrict benefits offered:
- eg community rating restricts pricing freedom

incentivizes the insurer to find other ways to control risk profiles:
eg cherry-picking, declining cover (if allowed)

consumer behaviour may be altered:
eg higher risk of anti-selection

distributor behaviour may be altered

Question 5

List challenges to state healthcare provision

Answer 5

commitments to low taxation
taxable workforce reducing

ageing populations
burden of disease - eg HIV
increasing demand for healthcare (due to medical innovation)

healthcare inflation

access to skilled healthcare professionals and infrastructure (medical professionals may leave the country once trained)

Question 6

List 2 functions of actuarial association guidance

Answer 6

framework of points to consider when actuary carrying out his/ her responsibilities
interpretation of government regulations

Question 7

Explain the difference between regulating on an admissible assets basis vs allowable assets basis

Answer 7

regulating on an admissible assets basis: specifies the maximum amount of a particular asset that may be considered when demonstrating solvency

regulating on an allowable assets basis: offense to invest in assets outside the allowable assets

Question 8

List characteristics of admissible assets vs allowable assets

Answer 8

admissible assets:
less restrictive, more discretion given to insurer
allows insurer to take advantage of investment opportunities and manage solvency
may lead to inappropriate exposure to certain asset classes

allowable assets:
more restrictive
providers greater protection to policyholders
may exclude asset classes with relatively high expected returns