Chapter 2 - External environment

Question 1

List the factors to consider in relation to the external environment

Answer 1

CREATE GREAT LISTS

• Competition and the underwriting cycle
• Regulation and legislation
• Environmental issues
• Accounting standards
• Tax
• Economic outlook
• Governance
• Risk management requirements
• Experience from overseas
• Adequacy of capital
• Trends demographic
• Lifestyle considerations
• Institutional structure
• Social trends
• Technological changes
• State benefits

Question 2

List four examples of how benefits from financial products and schemes can be taxed

Answer 2

1. it can be received tax free
2. the excess of benefits over contributions can be taxed as income or as capital gains
3. the benefit can be taxed entirely as income
4. a portion of the benefit can be tax free with the rest being taxed

Question 3

What is the role of non-executive directors in corporate governance?

Answer 3

• provide an impartial view and represent the shareholders’ interests
• play a leading role in setting the remuneration for the executives pay
• play a leading role in the audit committee

Question 4

What are mutual societies?

Answer 4

they have no shareholders and profits belong entirely to policyholders.

Question 5

Give four examples of an ageing population on the economy or the state

Answer 5

• older people are more likely to save money than spend it. this leads to deflationary pressures on economies
• some pay as you go state pension systems become unsustainable, since less people are working and more people rely on state welfare
• cost of healthcare would increase dramatically
• the cost per capita of educating the population will tend to fall

Question 6

What are the key features of mutual and proprietary financial providers?

Answer 6

Mutuals
- no shareholders
- profits belong entirely to with profit policyholders
- restricted access to new capital

Proprietaries: shareholders
- public
- easier access to capital
- more dynamic management

-Proprietaries : private
- restricted access to capital
-possible benefits from close involvement of owners