External Environment Flashcards
Legislation and regulation
Require compulsory insurance in certain circumstances
Influence the types of product available
Regulate the sales process
State benefits
• raise employers’ awareness of the need to top up state benefits
• raise individuals’ awareness of the need to top up state benefits
• reduce levels of saving if benefits are means-tested
• may require compulsory contribution
• can introduce moral hazard, i.e. the risk of individuals relying on the state and not purchasing their own cover
Tax
Affects the form of benefits within products
Means that product innovations may be designed to avoid paying tax, e.g. inheritance tax
Directs savings towards the most tax-effective forms (i.e. preference for income or capital gains) or tax shelter (e.g. ISAs)
Accounting standards
Influence an employer’s provision of employee benefits
Influence the range of products marketed
Risk management requirements, capital adequacy and solvency
Form part of banking and insurance regulation
May impose minimum standards of risk governance, including risk management roles within a firm, as well as minimum capital requirements
Are moving towards risk based frameworks, e.g. Solvency II for insurers
Corporate governance
• encourage managers to act in the best interest of stakeholders
• incentivizes managers accordingly
• may utilize non-executive directors
• influences the way in which stakeholders’ needs are met
Private companies
May find the same difficulties as mutual in raising capital, but benefits from a close involvement of the owners and potential access to significant additional capital
Competitive advantage and commercial considerations
An important concept is the underwriting cycle. The position in the cycle is an important consideration when making strategic decisions
The underwriting cycle relates to:
• profitable business leading to new entrants, greater competition, “soft” premium rates and reduced profits, leading to…
• …insurers leaving the market or reducing their involvement, increased premium rates or loss of business or reduced solvency and the need for capital
For banks the equivalent business cycle is driven by changes in interest rates and by economic activity
Changing cultural and social trends
Include aspects such as the level of home ownership
Impact on the financial products, schemes, transactions and risk assessment approaches available
Demographic changes
• can have a major impact on main benefit providers, e.g. the state
• including increasing longevity and falling birth rates
• may result in an aging population, which leads to:
- less spending, as people of working age save more as they get older
- a strain on social welfare systems
- an increased cost on healthcare
- the cost of education falling
• are also affected by climate change: mortality, morbidity and migrations
Climate change and other environmental issues
• influence the ways in which the Government, advocacy groups and individual participants act, and hence the behavior of the financial markets
• have led to providers offering products that promote environmental and ethical issues
• affect how providers communicate with customers, e.g. reducing the amount of paperwork
• the government may seek to control emissions by issuing permits, which may be traded between polluters and organizations that do not pollute
• climate change may lead to physical risks, transition risks and liability risks for the insurance sector
Lifestyle considerations
• younger people have preferences for loans rather than savings
• people with children may have a need for life insurance protection products
• older people may have a need for annuities and long-term care products
International practice
May lead to overseas products being replicated in the domestic market, subject to tax and legislative considerations
Technological changes
• impact on the way in which financial products are provided, e.g. internet’s price comparison websites, telephone banking, social media
• impact on wider administration processes, e.g. registering claims, customer enquiries
