Regulation

Question 1

Outline the risks associated with regulatory intervention on the benefits offered on a product (7)

Answer 1

• Products will need to be repriced and there might not be data available on claims and policyholder behaviour under new policy conditions.
• New product features may be unattractive to customers, leading to reduced sales and premium volumes, which may result in companies not recouping expenses.
• It is difficult to predict the impact of these changes under different economic conditions. This adds the uncertainty of the impact of these changes.
• If policyholders do not understand that benefits are governed by legislation, they will blame the companies for poor benefits leading to reputational risks for companies.
• The indirect impact of these regulatory changes may be lower future product innovation and greater standardisation.
• Product standardisation could lead to products being mostly differentiated by price and high competition could lead to unsustainably-low premium rates.
• Changing administrative and other processes may be difficult and costly.

Question 2

What kind of controls do regulators have when it comes to investment strategies?

Answer 2

STRICT LAL
Solvency limits on asset recognition
Third-party custodianship
Reserve requirements, like mismatch reserve
Investment type restrictions
Currency matching A and L
Thresholds on single counterparty exposure

Limits on mismatching
Asset class holding requirements like gov bonds
Limits on how much of any one asset class counts for solvency

Question 3

What are the restrictions governments may impose on life insurers (8)

Answer 3

• C – Channels
  
  • A – Amount of business
  • R – Rating factors
  • T – Types of products
  • U – Underwriting
  • R – Restrictions on premiums
  • T – Terms & conditions
  • I – Investment restrictions

Question 4

What are the ways in which insurers can be taxed (3)

Answer 4

• annual profits
• investment income less operating expenses
• tax on premiums

Question 5

What does the overall attractiveness of a product depend on(7)

Answer 5

ICIC+Tax
* investment strategy or performance
* customer service
* innovative features or attractive options
* complex products are difficult to compare

• tax treatment of premiums paid (deductible?)
• tax oof insurer’s fund during life of contract
• eventual policy benefits

Question 6

To limit the impact of climate change on financial systems, what regulations are developed for financial institutions (3)

Answer 6

• consider climate change risks in exiting business planning, investment management and risk management
• disclose and report climate related risks and opportunities
• adopt a consistent and reliable means assessing, pricing and managing climate-related risks