extra Flashcards
FCA consumer duty- when does it apply from and what are the three tiers
31 July 2024
1. Act in good faith
2. Avoid foreseeable harm
3. Enable and support retail customers to achieve their objectives (cross cutting rules)
What are the 4 areas of the cross cutting rules?
- Products and services
- Price and value
- Consumer understanding
- Consumer support
Business ethics
Standards by which a company or organisation sets itself in its dealing with the organisation and outside within the business and social environment
Shareholder focus
the key responsibility of a business is to look after its shareholders, society can look after itself
What should be considered in stakeholder management?
- Composition and significance of each group
- Power that each group can exert
- Legitimate claims each group may have
- Degrees to which these claims conflict and significant areas of concern
- Extent to which org is satisfying claims
- Overall mission of organisation
Stakeholder perspective
In their long-term interest to take an interest in society beyond what is required by law
ESG disclosure-
companies act 2006- annual disclosures required for larger companies that are listed, >500 employees or £5m turnover
Companies act 2022
Further disclosures of nonfinancial info eg. Sustainability, thus now report on energy and carbon usage
Sustainability disclosure requirements
Framework for companies to handle sustainability opportunities whilst also establishing measurable goals and objectives- full mandatory disclosure not a requirement until 2025
CII code of ethics
- Comply with code and relevant laws
- Act with highest ethical standards and integrity
- Act in best interest of each client
- Provide high standard of service
- Treat people fairly regardless of sensitive personal data (sexuality etc)
Why is organic growth weird in the insurance industry?
Takes a while for the claims pattern to emerge meaning that it is very much a long term business- even though managers are usually under pressure from a short-term perspective
Strengths of organic growth
Less risk than external growth
Financed through internal funds
Builds on existing strengths
Allows business to grow at a more sensible rate
More economic than acquisitions
Disadvantages of organic growth
Takes more time to grow as it needs employees who can handle the growth process
Takes longer to grow a book of business than to purchase a preexisting book
What are the aims of horizontal integration?
Two companies in the same market, aimed at:
Improving to a better market position
Achieving economies of scale
Improving competitiveness
Opportunities for diversification
Aims of vertical integration?
Company trying to get closer to source of the manufacturer or source of the customer, aims to:
Reduce costs through economies of scale
Gain more control including sources of supply
Add value to the whole customer proposition eg. When an insurer acquires a service company
Reasons for insurance M&As
Economies of scale
Resource sharing (eg. IT)
Investment opportunities if spare capital
Diversification (spread risk if they have two different books of business)
Disadvantages of M&As
Reduced customer choice
Cost of redundancy/staff morale
Clash of corporate cultures
Eye off the ball whilst changes take place
Reduced customer service whilst changes are implemented
Expected M&A savings not always realised
what is corporate governance concerned with?
-how organisations are directed and controlled
-how objectives are established, achieved and monitored
-responsibilities of the board, management and shareholders
(-transparency and accountability are the most important elements of good corporate governance)
what are the key sections of the 2018 UK corporate governance code?
-board leadership and company purpose
-division of responsibilities
-composition, succession and evaluation
-audit, risk and internal control
-remuneration
what does the FRC’s ‘Guidance on Audit Committees’ do?
Helps board with their actions and decisions when reporting on the application of the code’s principles
what topics does the guidance on board effectiveness deal with?
-board leadership and company purchase
-division of responsibilities
-composition, succession and evaluation
-audit, risk and internal control
-remuneration
what do the regulations of the companies act 2006 affect?
-company formation
-statutory reporting
-company meetings
-responsibilities of a company’s directors and officers
what is the purpose of the Sarbanes-Oxley (SOX) Act 2002?
it’s aimed at overcoming corporate scandals and features then need for auditor independence, corporate responsibility and enhanced financial disclosures
what must a business review for a quoted company include?
-trends and factors likely to affect the future of the business
-information on environmental matters, employees, social ad community issues ,
-contractual arrangements which are essential business to the company
what will the annual accounts of most companies include?
-income statement (profit and loss account) -balance sheet signed by a director - directors report signed by a director or company secretary
Gross profit percentage
(gross profit)/sale x 100
Net profit percentage
(net profit)/(sales (revenue or turnover)) x 100
Shows how well a business manages its expenses
Return on capital employed
(profit before interest charges and tax)/(share capital+reserves+borrowings) x 100
Shows how well management has deployed resources available to it, irrespective of financing
Low ROCE wiped out in recession
Receivables/debtors collection period
(trade receivables/debtors)/sale x 365 days
Aim to collect debts asap as it incurs opportunity cost
Payables/creditors
(payables /creditors)/purchase x 365 days
Free finance to company so put off paying as long as possible
But ignores value of cash settlements/discounts from suppliers
Also delays may result in reduction of general terms of trade that suppliers offer
Inventory/stock turnover period
(inventory/stock)/(cost ofsales) x 365 days
Number of days that stock is held for, long turnover period may show business is slowing down
Current ratio
(current assets )/(current liabs)
Liquidity ratio
Over 2 shows creditworthiness, but recently 1.5 has become normal
Supermarkets have a low current ratio as they buy goods on credit and sell for cash (less than 1)
Quick ratio
(current assets excluding stock)/(current liabs)
Liquidity ratio
Often below 1- means that if they paid all their creditors and collected from all their debtors at once, they would require an overdraft
Stock turnover
(cost of sales)/(average stock)
Changes in this affect liquidity, if stock has slow turnover, less cash is generated and more cash is tied up
Debt turnover
sales/(debtors stock)
Debit turnover= debtors stay on the books for x months and take x time to pay
Credit turnover
purchases/creditors
Shows credit turnover in times per year
Gearing
(long term borrowings)/(shareholder^’ s equity ) x 100
Shows extent to which company finances activities from borrowings as opposed to shareholders equity
Higher the ratio the more the business relies on debit finance
Higher the level of debit the greater the risk
INSURANCE
Insurer using debt capital usually has gearing ratio from 10%-25%
<10%= low level of gearing
>40%= highly geared
High level of gearing preferred to:
- Losing control by issuing shares
- With fewer shares there are fewer shareholders to get dividends so higher increase in dividends
Solvency capital requirement
(total eligible capital)/(solvency capital requirement)
Solvency ratio
(net assets)/(earned premium net of reinsurance)
Problem is in a hard market where the premium rates increase this will be shown as a deterioration but is in fact an improvement
Company with a high level of capital is seen as overcapitalised but has lower return on equity than a company with a lower level of capital
Liquidity
(total liabs)/(cash+investments)
Lower the result the greater the liquidity
Insurers liquidity calc differs from others as liquidity can come from freely marketable investments which are held to fund claims
Return on equity
(profit after tax)/(shareholder^’ s equity (capital)) x 100
Shows if the insurer is making money,
Deals with relationship between profit and shareholders capital
Higher the figure the better the return
Investors want at least 2.5x what they would get if they put it in a bank deposit account for 5 yrs
Combined ratio
(claims+expenses+acquisition costs)/(earned premium net reinsurance) x 100
Measures underwriting performance
U/w use it to see how a line of business is doing
Competitors sue it to gauge how effectively competition is underwriting
Senior execs
Does not account for investment income
Tracks performance rather than profitability
<100% shows good underwriting performance
>110% shows catastrophe losses
Claims ratio
(claims incurred net reinsurance)/(earned premium net reinsurance) x 100
Expense ratio
(administrative expenses)/(earned premium net reinsurance) x 100
Commission ratio
(acquisition costs)/(earned premium net reinsurance) x 100
Normally between 10/20%, but a lot higher for delegated authority schemes
Outstanding claims ratio
(net assets)/(earned premium net of reinsurance)
Lower the ratio the more secure the position
But an under-reserved company will show a better result
