Summary: Chapter 3 - External Environment Flashcards
External Environment:
Legislation and regulations
- Require compulsory insurance in certain circumstances
- Influence the types of product available
- Regulate the sale process
External Environment:
State benefits
- 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.
External Environment:
Tax
- 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
External Environment:
Accounting Standards
- Influence an employer’s provision of employee benefits
- Influence the range of products marketed
External Environment:
Capital adequacy and solvency
- forms part of banking and insurance regulation
- is carried out using a complex capital adequacy framework, Basel II, for banks
External Environment:
Corporate governance
- 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
External Environment:
Risk management requirements
- 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
3 types of Basel II risk
- market risk
- credit risk
- operational risk
External Environment:
Mutuals
- 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
External Environment:
Proprietary company
- easier access to capital markets for finance
- economies of scale
- more dynamic management
External Environment:
Private companies
- may find same difficulties raising capital
- benefit from a clos involvement of the owners
The underwriting cycle relates to
- 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
External Environment:
Demographic changes
- can have major impact on main benefit providers, eg State
- include increasing longevity and falling birth rates
- may result in angeing population
Results of ageing population
- less spending, as older people save more
- strain on social welfare systems
- increased cost of healthcare
- cost of education falling
External Environment:
Environmental issues
- 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
External Environment:
Lifestyle considerations
- younger people have preferences for loans rather than savings
- people with children look towards life insurance protection products
- older people may have a need for annuities and long-term care products
External Environment:
International practice
leads to overseas products being replicated in the domestic market, subject to tax and legislative considerations
External Environment:
Technological changes
impact on the way in which financial products are provided.
market risk
risks relating to variations in values of assets and liabilities
credit risk
risks relating to the failure of 3rd parties
operational risk
relating to the failures of people, processes and systems within the company
