CH 2: External environment

Question 1

List 16 external environment considerations

Answer 1

Corporate structure
Regulation and legislation
Environmental issues and climate change
Accounting standards
Tax
Economic outlook

Governance
Risk management requirements
Adequacy of capital and solvency
New business environment
Demographic trends

Lifestyle considerations
International practice
State benefits
Technology
Social and cultural trends

CREATE GRAND LISTS

Question 2

Corporate Structure:

Mutuals 5 Points

Answer 2

Mutuals
* Started by benefactors lending initial capital, no req to pay back unless profits emerge
- No shareholders, profits belong to policyholders
- Better benefits for the same cost
- Finance cannot be raised from capital markets, restrict products offerred.

2 methods of pricing
- Surplus distribution: with profit company
- Pricing at cost

Question 3

Corporate Structure:

Proprietaries 4 Points

Answer 3

Proprietaries
* Public or private
- easier access to capital markets for finance ( exclu private prop)
- economies of scale
- more dynamic management

Question 4

Regulation and Legislation:

Legislation and regulations, definitions and explanation

Answer 4

Legislation: Law formally declared by the governing body

Regulation: a secondary form of legislation, used to implement the primary legislature

• Influence the types of product available

Regulate the sale process :
- Compulsory benefits, max charges, disclosure of info

Question 5

Environment and Climate change:

3 Points

Answer 5

• 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

Question 6

Accounting standards:

3 Points

Answer 6

• May influence an employer’s provision of employee benefits
• Influence the range of products marketed and their wrappers
• Wrapper: How the product is brought to the market
  eg. Savings product as endowment assurance

Question 7

Tax:

3,2,1

Answer 7

Benefits
- Tax free
- Excess benfit over contributions
- Entire benefit (tax free threshold)
- eg Inc protection premiums tax deductible and benefit taxed - insure gross income

Contributions
- Double tax is avoided, taxed on contributions then no tax on benefit. vice versa
- Income Tax/ CGT

Influence over type of products avaialble in market

Question 8

Economic outlook

1

Answer 8

Business cycle affect on macro factors, eg inflation, interest, exchange rates

Question 9

Governance

Def + Aim + Strategy 1,1,2,1

Answer 9

High-level framework for managerial decisions in a company

Aim: Efficient management of company in order to meet requirements of stakeholders (not only management interests)

Strategy:
- Remun should incentivise management to act for stakeholders. eg share options.
- Non-exec directors, impartial view set rem for execs

King IV report, standard of good corporate governance

Question 10

Risk management requirements:

2

Answer 10

• Form part of regulation that imposes min level of risk management.
• Required to hold capital provisions to account for risk

Question 11

Adequacy Capital and solvency:

2,4

Answer 11

Calc of capital reserve and excess capital required use:
- Solvency Assessment and Management: capital req measured on risk based approach
- Basel: used for banks capital required.

Aims of the regulatory requirements:

• Reduce the risk of insurers being unable to meet claims
• Reduces losses suffered by policyholders when insurers can’t meet claims
• Early warning system for regulators to intervene when capital is not adequate
• Ensure confidence in the insurance sector

Question 12

New business environment

Underwriting cycle 4,3,2

Answer 12

Underwriting Cycle
1. Business is profitable => New Entrants, greater competition, lower premium rates =>
2. Reduced Profits (depression), companies don’t generate profits=>
3. Insurers Exit or reduce involvement =>
4. Less competition, increased premium rates =>** Profitable Business**

Some remain in loss making market:
- Acc losses < expected profit.
- Cost withdraw and re- enter too high
- Loss leader products offerred first.

Profit patterns
- Long term: Profit and losses even out
- Short term: Profitable classes may subsidise losses in other classes

Question 13

Demographics:

1,2,3

Answer 13

• Impact on benefit providers experience, assumptions.

2 sources of population ageing:
- Rising life expectancy
- Declining fertility

Results of old population:
- Less Spendin, saving for retirement
- Strain welfare systems, unsustainable
- Cost of healthcare increases.

Question 14

Lifestyle considerations:

4

Answer 14

• Younger people: have higher demand for loans rather than savings
• People with dependents: look towards life insurance protection products
• Older people:may have a need for annuities and long-term care products.
  Longevity => more saving and for longer, so assets aren’t exhausted before death. Higher demand for savings and less spending
• Retired: no savings and high spending. need for annuities

Question 15

International practice:

2

Answer 15

• Providers may look at the suitability of replicating overseas products in the domestic market
• differences in tax and legislature must be considered

Question 16

State benefits:

2

Answer 16

For an individual:
- Less need for self-provision eg emergency healthcare is free
- Discourages saving if mean tested, better value if spend everything

Question 17

Technological changes:

4

Answer 17

• Methods of sales and distribution have changed
• Easier to reach specific target markets
• Improvements of pricing assumptions eg reduction in mortalility
• Microinsurance provided on larger scale eg MTN

Question 18

Social and cultural trends:

Answer 18

• Impact on products available and business practices.
• eg home ownership not rentals
  Green business palns and straetgies being supported.