Chapter 2 - External Environment

Question 1

Impact of External Environment?

Answer 1

• Legislation and Regulations
• State Benefits
• Tax
• Accounting Standards
• Risk Management Requirements, Capital Adequacy and Solvency
• Corporate Governance
• Private Companies
• Competitive Advantage and Commercial considerations
• Changing Cultural and Social Trends
• Demographic Changes
• Climate Change and Environmental issues
• Lifestyle Considerations
• International Practice
• Technological changes

Question 2

Impact of Legislation and Regulation?

Answer 2

• Requires compulsory insurance in certain circumstances
• Influence types of products available
• Regulate the sales process

Question 3

Impact of State Benefits?

Answer 3

• Raise awareness (employer or individual)
• Reduce levels of savings if benefit is means tested
• May require compulsory contributions
• Can introduce moral hazard - risk of individuals relying on state and not purchasing own cover

Question 4

Impact or Tax?

Answer 4

• Affects the form of benefits within products
• Product innovations may be designed to avoid paying tax
• Directs savings towards the most tax-effective forms

Question 5

Impact of Accounting Standards?

Answer 5

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

Question 6

Impact of Risk Management requirements, capital adequacy and solvency?

Answer 6

• Forms part of banking and insurance regulation
• May impose minimum standards of governance and minimum capital requirements
• Moving towards Risk Based frameworks; Solvency II

Question 7

Impact of Corporate Governance?

Answer 7

• Encourage managers to act in best interest of stakeholders
• Influences the way in which stakeholder’s needs are met

Question 8

Impact of Private Companies?

Answer 8

• Raising capital
• How surplus is distributed

Question 9

Impact of competitive advantage and commercial sonsiderations?

Answer 9

• Position in the underwriting cycle is an important consideration in strategic decisions
• Highly Competitive leads to lower premium and Insurers leaving or reducing involvement
• For banks this is changes in interest rate and economic activity

Question 10

Impact of changing Cultural and Social trends?

Answer 10

• Include aspects such as home ownership
• Financial products, schemes, transactions and risk assessment approaches available

Question 11

Impact of Demographic changes?

Answer 11

• Can have major impact on benefit providers
• Include increasing longevity and falling birth rates
• May lead to aging population, that can lead to:
  
  • less spending, older people save more
  • strain on social welfare
  • increased cost of healthcare
  • cost of education falling
• also affected by climate change, mortality, morbidity and migration

Question 12

Impact of Climate Change?

Answer 12

• Influence the behavior of financial markets (Government, Advocacy groups and individual participants)
• Providing products that promote environmental and ethical issues
• affect how providers communicate with customers (less paperwork)
• Lead to physical risk, transition risk and liability risk for insurers

Question 13

Impact of Lifestyle considerations?

Answer 13

• Young people prefer loans to savings
• People with children have a need for life insurance protection products
• Older people have a need for annuities and long term care products

Question 14

Impact of International products?

Answer 14

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

Question 15

Impact of Technological changes?

Answer 15

• The way financial products are provided
• Impact on the wider administration processes