M_F102_General Business Environment and Risk

Question 1

The General Business Environment factors

Answer 1

Propensity of consumers to purchase products

The main distribution channels

• Intermediaries/brokers,
• tied agents,
• companies own sales force and
• direct marketing

The effect of the different channels

• demographic profile,
• contract design,
• contract pricing

Distribution channels and the Actuarial Control Cycle

Question 2

The General Business Environment explanation

Answer 2

Insurance products are generally not sought, and need to be sold.

Imbalance of power (knowledge and information), generally good for consumer once need is highlighted- mutual benefit to consumer and insurer ensures long term sustainability of product.

Misselling leads to poor persistency and potentially reputational damage.

Changing consumer behaviour necessitates need to review products.

Question 3

Demographic profile efffects

Answer 3

different channels reach different people (level of financial sophistication and income) which affects experience (claims and persistency).

Question 4

Contract design effects

Answer 4

more sophisticated target client base can be sold more sophisticated products (e.g. if newspaper ad, needs to be quite simple).

Question 5

Contract pricing effects

Answer 5

distribution channel affects U/W regime, mortality/withdrawal assumptions, need for competitive terms (price, bells and whistles, investment performance, service levels, too complicated product may be hard to compare).

Question 6

Commission and expenses:

Answer 6

costs insurer incurs in running business; commission usually initial/renewal, initial may be recouped on lapse (RDR currently looking at this); expenses can be divided in various way (initial/renewal/overheads, method of loading into premium, fixed/variable), expense inflation risk, risk of fluctuating business levels.

Question 7

Economic environment:

Answer 7

availability of assets; stability of yields; comparable investments vs. life product; volatility in economy affects cost of insurance, capital; riskier economies may yield greater reward.

Question 8

Legal environment:

Answer 8

political instability introduces legal risk; careful when insurer has discretion (policyholder reasonable expectations, TCF); long term products subject to legal changes over time; risk of misrepresentation by staff/agents.

Question 9

Regulatory constraints and opportunities:

Answer 9

usually regulator aims to ensure insurer can meet promise to customer; downside is that over-regulation may reduce innovation; affects contract design; may have competitors subject to different regulation (e.g. asset managers).

Question 10

The fiscal regime:

Answer 10

method of taxation (profits and investment income); tax may be used as a tool to encourage certain types of products; tax also impacts product design; risk of changes in tax regime.