O Chapter 2 External Environment Flashcards
Factors of external environment
CREATE GRAND LISTS
Corpotate structure
Regularion and legislation
Envitonmental issues and climste change
Accounting standards
Tax
Economic outlook
Governance
Risk managenent requirements
Adequacy of capital and solvency
New business environment
Demographic trends
Lifestyle considerations
International practice
Stare benefits
Technology
Social and culrural trends
Legislation and regulation
Legislation: law formally declared by the governing body
regilation: a secondary form of lrgislation, used to implement thr primary legislature
require compulsory insurance in certain circumstances
influence the types of product available
regulate the sale process
Often compulsery insurance
- employers liabiliry
- motor third party liability
Tax
- tax treatments will have an impact on the needs of individuals
- affects the type and form of products offered by the financial service indusrey
- means that product innovations may be designed to avoid paying tax
- inheritance tax will change the amoumt of money passed down
- directs savings towards the most tax effective forms of tax shelters
Tax of financial shemes and producrs
- benefirs can be received free of tax
- the excess of benefits over contributions can be taxed as income or as capital gains
- benefits can be taxed entirely as income
- a portion of the benefits can be tax free, with the balance being taxed
Tax of other benafits
Some arrangements may offer tax relief in contributions, normally coupled with tax on the resulting benefits.
Alternatively, contributions may be paid from taxed income, normally coupled with tax relief in the resulting benefits.
Income and gains may be taxed during the accumularion phase, normally coupled with no tax on the policyholders gains.
Tax may be payable on iheritance. Insurance can be availabke to cover this tax liability
Define corporate governance and outline the features of a good corporate governance framework
Corporate govetnance is the high level framework within which a companys managetial decisions are made.
Agood corporate governance framework:
* Encourages managers to act in the best intrests of stakeholders, rather than in their own persomal interests
* Incentivises managers in a way to achieve the first aim
* Utilises non executive directors
* Influences the way in which stakehilders needs are met
Key features of mutual and proprietary financial providers
Mutuals- no shareholders:
* Better benefits as profits belong to with profit policyholders
* Restricted access to new capital, which may restrict product offerings
* Specific distributions of profit are made, or contacts priced at cost
Proprietaries - shareholders:
Public proprietsry companies
* easier access to capiral markets for finance
* possible benefits of economies of scale
* more dynamic management
Private proprietary companies
* restricted accesss to capital
* possible bemefits from close involvement of owners (owners may have sccess to significant additional capital, edge over mutauls and public proprietaries)
Profits may be shared between shareholders and with profit policyholders
The underwriting cycle
Profitability on the various insurance classes tend to go in cycles, drivem by market forves of supply and demand combined with actual claims experience and economic climate.
When business is profitable, more insirers enter the market. Premium rates reduce as insurers compete for market share.
This leads to reduced profits or to losses, loss of business and reduced solvency, and the cycle goes into depression. The position may be accentuated by catastrophes or by the economic climate.
At the bottom of the cycle, insurers leave the market or reduce their involvement in the classes concerned. Eventually premium rates increase to cover the losses being incurred and in the light of emerging experience.
4 Examples of changes in social and cultural trends
- Increased home ownership increases the demand for mortgages
- Cuts in state healthcare increaes the demand for private health insutance
- Increasing prosperity increases the deand for savings products
- Increased use of telematics for motor insurance, in many countries, allows the risk factors of the individual, the policyholders driving behavior and other factors to be monitored through a device installed in the insured vehicle or a smart phone app
- Increased awarnes for environmental ishues may prompt companies to reduce thier carben footprint to keep thier curent PH and atract new clients
- Inveras in spair income may result in an increas in demand for savings products
Other trends increacing the impact of climate change
Unplaned urbanisation:
* Overcrowding
* warer shortages
* poor sanitation (leading to cholera, diarrhoea, respiratory illnesses, heat stress)
Developing on the coast:
* increased susceptibility to sea level rise and extreme weather such as hurricanes and tiphoons
Other trends mitigating the impact of climate change
Building climate smart citys(erecting flood defences, electric transportation):
* reducing greenhouse gass emissions
* mitigating the effects of clinate change
Afforestation (planting more trees):
* removing greenhouse gases from the atmosphere
Emitions trading
this is a market based approach to address pollution, with the aim of minimizing the cost of meeting an emissions target set by the govetnment.
The govetnment ossues permits to emit up to the ovet all limit. Permits are sold or are equal to historical teading emissiona for each polluter. A paeticipant can use permits ezactly, or emit less and sell the excess permits, or emit more and buy permits from other pollurers.
The usual aim is for the govermment to lower the overall limit over time.
International practice
- providers may look at the suitabiliry of replicating overseas products in the domestic market
- differences in tax and legislature must be sonsidered
Technological changes
- impacts the distribution of financial products
- easier to reach specific target markets
- better pricing and may reduce costs
6 Examples of technollogical advances that can have an impact on the availability of financial products, schemes, contracts and transactions
- Internet quotation and sales
- Price comparison websites
- Banking over the internet and phone
- Social media for advertising and links to sales/enquiry websites
- Insurance companies increasingly using websites to capture customer enquiries and register claimsand transactions
- Email as a fully accepted and widely used means of comunicaron
Capital is required to covet which 3 risks
market risk
credit risk
operational risk
