CH2 - External environment

Question 1

Legislation and regulations (3)

Answer 1

1. Require compulsory insurance in certain circumstances
2. Influence the types of product available
3. Regulate the sales process

Question 2

State benefits (5)

Answer 2

1. Raise employers’ awareness of the need to top-up State benefits
2. Raise individuals’ awareness of the need to top-up State benefits
3. Reduce levels of saving if benefits are means-tested
4. May require compulsory contributions
5. Can contribute moral hazard, i.e the risk of individuals relying on the State and not purchasing their own cover.

Question 3

Tax (3)

Answer 3

1. Affects the for of benefits within products
2. Means that product innovations may be designed to avoid paying tax, e.g. inheritance tax
3. Directs savings towards the most tax-effective forms (i.e preference for income or capital gains) or tax shelters (e.g. ISAs)

Question 4

Accounting standards (2)

Answer 4

1. Influence an employer’s provision of empoyee benefits

2. Influence the range of products marketed

Question 5

Risk management requirements, capital adequacy and solvency (3)

Answer 5

1. Form part of banking and insurance regulation
2. May impose minimum standards of risk governance, including risk management roles within a firm, as well as minimum capital requirements
3. Are moving towards risk-based frameworks, e.g. Solvency II for insurers

Question 6

Corporate governance (4)

Answer 6

1. Encourages managers to act in the best interests of stakeholders
2. Incentivises managers accordingly
3. May utilise non-executive directors
4. Influences the way in which stakeholders’ needs are met

Question 7

Private companies (2)

Answer 7

1. May find the same difficulties as mutuals in raising capital, but
2. Benefit from a close involvement of the owners and potential access to significant additional capital.
   All proprietary companies have the issue of how to distribute surplus between shareholders and any with profit policyholders.

Question 8

Competitive advantage and commercial considerations (2)

Answer 8

An important concept is the underwriting cycle. The position in the cycle is important consideration when making strategic decisions.
The underwriting cycle relates to:
1. Profitable business leading to new entrants, greater competition, ‘soft’ premium rates and reduced profits, leading to…
2. … insurers leaving the market or reducing their involvement, increased premium rates or loss of business or reduced solvency and the need for capital

Question 9

Changing cultural and social trends (2)

Answer 9

1. Include aspects such as the level of home ownership

2. Impact on the financial products, schemes, transactions and risk assessment approaches available

Question 10

Demographic changes (3)

Answer 10

1. Can have a major impact on main benefit providers, e.g. the State
2. Include increasing longevity and falling birth rates
3. 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 failing

Question 11

Climate change and other environmental issues (3)

Answer 11

1. Influence the ways in which the Government, advocacy groups and individual participants act, and hence the behaviour of the financial markets
2. Have led to providers offering products that promote environmental and ethical issues.
3. Affect how providers communicate with customers, e.g. reducing the amount of paperwork

Question 12

Lifestyle considerations (3)

Answer 12

1. Younger people have preferences for loans rather than savings
2. People with children may have a need for life insurance protection products
3. Older people may have a need for annuities and long-term care products

Question 13

International practice (1)

Answer 13

May lead to overseas products being replicated in the domestic market, subject to tax and legislative considerations

Question 14

Technological changes (2)

Answer 14

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