Part 2 - General Business Environmet & Risk Flashcards
Why is life insurance sold, not bought?
- public is unaware of the need (ignorance or belief that event wont happen to them)
- dearh may be a taboo subject
- product are difficult to understand
- difficult marketplace (too many providers to know which is best and best suited for needs)
- time consuming: general need for advice before making long-term financial commitments
The 2 risks associated for selling inappropriate products?
Persistency risk
- and consequent financial losses
- the risk that policy lapses early
- persistency - rate of retention of policies that is experienced by the company
Reputational risk
- unable to sell new business
- inadequate premiums to cover expenses
- minimised if
— main elements of sales process is documented
— policy literature is clearly explained
— whilst remaining legally sound
New business risk
- new business volumes or risk (different mix of business) being different from what was assumed
Main distribution channels
- Insurance intermediaries
- Tied agents
- Own salesforce
- Direct Marketing
Insurance intermediaries
- independent from any insurer
- aims to find the best suited product for client (premium & benefits
- remuneration:
— commission (from company): when faced with similar product (all suitable), will choose one with highest commission. Less professional brokers would be more influenced by commission rather than product appropriateness
— fixed fee (from client): to demonstrate not influenced by commission - target market: white collar / educated. Seek advice to manage complex financial affairs
- lower mortality experience due to better access to healthcare
- higher financial sophistication
- sale initiated by client
- broker promotes themselves actively
Tied agents
- linked to one or several companies
- product ranges may be mutually exclusive, but more often overlap
- example: bank
— warm customers: already have a relationship with bank
— customers access through mailshots
— likely to buy bank’s products due to trust - remuneration:
— commission
— salary + bonus - client initiates sale, but some agents may actively engage in selling
- financial sophistication depends on target market
— bank will have access to broad cross-section of people
— min level of finsoph implied by having bank accounts
Own Salesforce
- employee of LI company
- only sells employer’s products
- remunerated through salary/commission/both
- seller initiates sale through client lists obtained through press advertising or personal contacts
- using own salesforce, beneficial for insurer to have a whole range of products
— once client is “warm” can try to sell other products - target market
— can be target at professionals or lower socio-economic groups
Direct marketing
- Mail shots
- insurer initiates sales
- mail may contain application form to be sent in - Telephone sales
- p/h or LI that initiate sales
- p/h when responding to an add
- LI in the case of cold calling - Press advertising
- may include short application
- may give number/address to obtain further info/application
- may give number to complete sale over the phone
- target market depends on newspaper - Internet selling
- search : sale initiated by p/h
- pop-up add: LI
- can be used to sell simple products / provide more info that leads to telephone sales
Demographic assumptions and distribution channels
- it is the target market rather than distribution channel
— however, target markets are reached through distribution channels
— some channels are associated with certain target markets - Key factors associated with demographic experience:
— level of income
— financial sophistication - the channel influences:
— underwriting required: more = higher price (brokers)
— withdrawal experience: lowest for brokers since needs are met
— mortality experience: lowest for brokers since clients are wealthy
Contract design and distribution channel
- higher level of finSoph -> greater complexity of products sold
- simpler products sold through telephone and press
- products should APPEAR simple
Contract pricing and distribution channels
- Effect of demographic assumptions
Level of underwriting will reflect in die demographic assumptions used for pricing
- level of underwriting depends on marketing strategy used
- broker: most stringent. Direct marketing least stringent
— brokers represent interest of clients - might encourage anti-selection
— sale initiated by broker or p/h increases risk of anti-selection
— high networth individuals - need higher cover
— prices will need to be competitive, only achieved by selection of good risks
—direct marketing: low sum assured, less underwriting
- withdrawal rates affected by financial sophistication
— realising product is not suitable, withdraw at early duration
— unsoph: will buy unsuitable products - Effect on the need for competitive terms
Broker>tied agents>own sales> direct marketing
- brokers recommend product with lowest premium (all else being equal, incl COMMISSION)
- tied agents would want rates to competitive as to not damage good name (bank)
— however, no direct comparison
- own salesforce will not be in competitve position
- direct marketing competitiveness depends on target market
— more soph would require more competitive rates as they will compare
Other features make products more attractive:
- innovative features
- hard to compare via complex design
- past investment performance to compare saving product
- compete on level of customer service
Using the ACC when deciding on distribution channel
1.Specify the problem
- choose channel that will help meet targets for profitability and maintaining appropriate level of risk
- Develop a solution
- channel chosen will affect assumptions:
— volumes, types and mis of business likely to be sold in the future
— contract desing and pricing and policy size
— mortality morbidity and withdrawal rates
- test impact of variations from assumptions before choosing channel
- consider costs and risks of implementing a channel - Monitor the experience
- continually analyse impact of channel being used
- have levels, type and quality of new business materialised as expected
- if not, assumptions will need to change
Professionalism
- professional approach is neccesary
- bear customer interests in mind
- avoid unethical methods
- foster good practice and identify and rectify example of poor practice
General commercial environment
- analysis of possible channels in the market
- those used by competitors
Products that will need relatively little underwriting
Savings or small sum at risk products:
- annuities: except when favorable term offered to impaired lives
- unit-linked endowmnets with small death benefit
- other endowments where death benefit is significantly smaller than survival benefit
