9.2 External environment

Question 1

What are the influences of Legislation and regulations on benefit provision?

Answer 1

• require compulsory insurance in certain circumstances
• influence the types of product available
• regulate the sales process
• form part of banking and insurance regulation
• may impose minimum standards of risk governance, including risk management roles within a firm, as well as minimum capital requirements
• are moving towards risk-based frameworks, e.g. Solvency II for insurers

Question 2

What are the influences of State benefits on benefit provision?

Answer 2

• raise employers’ awareness of the need to top-up state benefits
• raise individuals’ awareness of the need to top-up state benefits
• reduce levels of saving if benefits are means-tested
• may require compulsory contributions
• can introduce moral hazard, i.e. the risk of individuals relying on the state and not purchasing their own cover

Question 3

What are the influences of tax on benefit provision?

Answer 3

• affects the form of benefits within products
• means that product features may be designed to avoid paying tax, e.g. inheritance tax
• directs savings towards the most tax-effective forms (preference for income or capital gains) or tax shelters (e.g. ISAs)

Question 4

What are the influences of accounting standards on benefit provision?

Answer 4

• influence an employer’s provision of employee benefits
• influence the range of products marketed

Question 5

What are the influences of corporate governance on benefit provision?

Answer 5

• encourages managers to act in the best interests of stakeholders
• incentivises managers accordingly
• may utilise non-executive directors
• influences the way in which stakeholders’ needs are met

Question 6

How do private companies access capital?

Answer 6

• may find difficulties in raising capital (no access to capital markets)
• benefit from a close involvement of the owners and potential access to significant additional capital

Question 7

Underwriting cycle

Answer 7

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.

Question 8

Changing cultural and social trends and demographics

Answer 8

1. include aspects such as the level of home ownership
2. impact on the financial products, schemes, transactions and risk assessment approaches available
3. can have a major impact on main benefit providers, e.g. the state
4. include increasing longevity and falling birth rates
5. may result in an ageing population, which leads to:
   * less spending, as people of working age save more as they get older
   * a strain on social welfare systems
   * an increased cost of healthcare
   * the cost of education falling

Question 9

Climate change and other environmental issues

Answer 9

• influence the ways in which the Government, advocacy groups and individual
• participants act, and hence the behaviour of the financial markets
• have led to providers offering products and investments that promote environmental and ethical issues
• affect how providers communicate with customers, e.g. reducing the amount of paperwork

Question 10

Lifestyle considerations

Answer 10

• younger people have preferences for loans rather than savings
• people with children may have a need for life insurance protection products
• older people may have a need for annuities and long-term care products

Question 11

Technological changes

Answer 11

• impact on the way in which financial products are provided, e.g. internet, price comparison websites, telephone banking, social media
• impact on wider administration processes, e.g. registering claims, customer enquiries.