Summary: Chapter 3 - External Environment Flashcards
1
Q
External Environment:
Legislation and regulations
A
- Require compulsory insurance in certain circumstances
- Influence the types of product available
- Regulate the sale process
2
Q
External Environment:
State benefits
A
- Raise employers’ awareness of the need to top up State benefits
- Raise employees’ awareness of the need to top up State benefits
- Introduce moral hazard, ie the risk of individuals relying on the State and not purchasing their own cover
- Reduce levels of saving if benefits are means-tested
- If compulsory, make individuals feel less wealthy and thus less able to purchase their own cover.
3
Q
External Environment:
Tax
A
- Affects the form of benefits within products
- Means that product innovations may be designed to avoid paying tax
- Directs savings towards the most tax-effective forms or tax shelters
4
Q
External Environment:
Accounting Standards
A
- Influence an employer’s provision of employee benefits
- Influence the range of products marketed
5
Q
External Environment:
Capital adequacy and solvency
A
- forms part of banking and insurance regulation
- is carried out using a complex capital adequacy framework, Basel II, for banks
6
Q
External Environment:
Corporate governance
A
- encourages managers to act in the best interests of stakeholders
- incentivises managers accordingly
- should be monitored for effectiveness
- may utilise non-executive directors
- influences the way in which stakeholders’ needs are met
7
Q
External Environment:
Risk management requirements
A
- are concerned with measuring, monitoring and controlling the impact of risks on a firm’s balance sheet
- can be categorised using the Basel II framework
8
Q
3 types of Basel II risk
A
- market risk
- credit risk
- operational risk
9
Q
External Environment:
Mutuals
A
- No shareholders
- Better benefits for the same cost
- Can’t readily raise finance by usual methods
- Certain products may be restricted or more highly priced
- Product pricing is either “at cost” or takes allowance for surplus distribution to with-profit policyholders
10
Q
External Environment:
Proprietary company
A
- easier access to capital markets for finance
- economies of scale
- more dynamic management
11
Q
External Environment:
Private companies
A
- may find same difficulties raising capital
- benefit from a clos involvement of the owners
12
Q
The underwriting cycle relates to
A
- 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
13
Q
External Environment:
Demographic changes
A
- can have major impact on main benefit providers, eg State
- include increasing longevity and falling birth rates
- may result in angeing population
14
Q
Results of ageing population
A
- less spending, as older people save more
- strain on social welfare systems
- increased cost of healthcare
- cost of education falling
15
Q
External Environment:
Environmental issues
A
- influence the ways in which Government, advocacy groups and individual participants act, and hence the behaviour of financial markets
- has led to providers offering products that promote environmental and ethical issues
- affects how providers communicate with customers, eg reducing the amount of paperwork
