Chapter 11: The general business environment 1

Question 1

Outline the main distribution channels: (4)

Answer 1

1. Insurance intermediaries, who select products for their clients from all or most of those available on the market.
2. Tied agents, who offer the products of one life insurance company or a small number of life insurance companies.
3. Own sales force, usually employed by a particular company to sell its products direct to the public.
4. Direct marketing via press advertising, over the telephone, internet or mailshots.

Question 2

What are the key risks to an insurer in the event that a policy is sold which does not meet the agreed needs a policyholder: (2)

Answer 2

1. persistency risk, and consequent financial losses - including the possibility of compensation.
2. reputational risk

Question 3

Describe Insurance intermediaries: (3)

Answer 3

1. Insurance intermediaries are salespeople who must act independently of any particular life insurance company (although they can be owned by one).
2. Their aim is to find the best contract, in terms of benefits and premiums, for their clients.
3. They may be remunerated via commission payments, by the companies whose products they sell or they may alternatively receive a fee from their clients.

Question 4

Describe Tied agents: (3)

Answer 4

1. Tied ages are salespeople who are “tied” to one, or sometimes several, life insurance companies, that is they offer to their clients only the products of those companies.
2. Typically they may be the employees of a bank or other similar financial institutions.
3. Tied agents are remunerated by the companies to which they are tied.

Question 5

Describe the distribution channel - Own salesforce: (3)

Answer 5

1. Members of an own salesforce will usually be employees of a life insurance company and hence will only sell the products of that company.
2. They may be remunerated by commission or salary or a mixture of both.
3. It will usually be the salesperson who initiates a sale, making use of clients lists.

Question 6

The four main forms of Direct marketing: (4)

Answer 6

1. mailshots
2. telephone selling
3. press advertising
4. internet selling

Question 7

Factors that different distribution channels have an effect on: (3)

Answer 7

1. demographic profile
2. contract design
3. contract pricing

Question 8

Distribution channels - the effect on Demographic profile

Answer 8

• Different channels are likely to appeal to different people, according to their level of financial sophistication and level of income.
• These differences will then be reflected in the resulting demographic experience of the lives taking out contracts through each channel.

Question 9

Distribution channels - effect on Contract design

Answer 9

The higher the level of financial sophistication of the client base the greater can be the complexity of the products being sold.

Question 10

Two aspects of the effect of distribution channels on contract pricing: (2)

Answer 10

1. the effect on demographic assumptions

2. the effect on the need for competitive terms

Question 11

Press advertising may take various forms, for example: (3)

Answer 11

1. It may include a short application form for the customer to complete and send in.
2. It may give a telephone number or address from which further information and an application form may be obtained.
3. It may give a telephone number to call for the sale to be completed on the telephone.

Question 12

Having competitive rates or charges is not the be-all and end-all for every product, even selling through intermediaries. For example: (4)

Answer 12

1. Products may be differentiated from the competition through innovative features or attractive options.
2. More complex products may be difficult to compare across companies.
3. Some savings contracts may compete as much on past investment performance as on premium rates or charges.
4. Some products may compete on the level of customer service or admin support.

Question 13

Distribution channels and the actuarial control cycle:

Answer 13

1. Specify the problem - At a “macro” level a company needs to decide which distribution channel or channels it should use.
2. Developing the solution - The choice of distribution channels will affect a number of important assumptions in the company’s projection models.
3. Monitoring and feedback - The impact of the sales distribution being used at the moment must be continually analysed.
4. Professionalism - A professional approach to sales distribution is necessary.