Chapter 1 Flashcards
Give an example of a risk that can be managed and a risk that requires financial protection (eg risks associated with property)
Risk that can be managed - Forgetting to lock your door and having valuables stolen
Risk that requires financial protection - Well locked property targeted by gang, broken into an robbed - home contents insurance
In which 2 ways are risks usually categorised?
2 ways
Level and severity of impact
Likelihood of occurrence
Give an example of a low impact risk and a high impact risk (eg regarding property)
Low impact- wall around property needs to be rebuilt due to wear and tear
High impact- property catching fire and burning to the ground
Give an example of a risk with higher and lower likelihood of occurrence in the UK (eg natural disasters)
Lower likelihood- earthquake
Higher likelihood- flooding
Which kinds of things make the most sense to insure and which make the least sense? (Think impact/occurance)
Compulsory insurance - motor insurance
High impact/low frequency - High impact as this will most affect your life, low frequency means there will usually be cover available
High impact/ high frequency- insurers less likely to offer cover
Low impact/low frequency
Give an example of each quadrant of the risk matrix
Low frequency/ low impact - minor injury (stubbing toe)
Low frequency/high impact - death/serious illness
High frequency/low impact - minor car accident
High frequency/ high impact - unemployment for an actor
How does life assurance make covering risk more cost effective
Life assurance transfers the risk from you to a group of individuals known as a mortality pool - usually most cost effective way for a consumer to cover such a risk
What does the annual risk of death chart show?
A chance of 1 in X chance of dying in the next year split by age and gender
In the UK, what is meant by the term protection insurance?
An insurance contract that provides the consumer with financial sums in the event of death, disability or long-term illness
Why might customer knowledge of financial protection cause them to not take out sufficient cover?
Failing to fully understand the impact of the risks
Confusing the role of savings versus insurance
Miscalculating the impact or frequency of death, disability or serious illness
What was the historical attitude of the life insurance industry?
What were the pros and cons of this cover?
Focused on traditional model of male bread-winner with wife, kids, mortgage and car
Individuals would start life with no protection needs and would gradually increase over time
Serviced by door to door insurance salesman
Access was easy but choice and value for money limited
How does an individual’s need for protection change as they go through their life? How does the type of protection change?
When we are born we are reliant on our parents/carers for everything
Leave home and start working and perhaps buy a house - need for protection of an individual nature
Marry/ have kids - protection is more about providing for family (less self focused)
What are some reasons that the attitudes of consumers have changed regarding financial protection products over the years?
Name 3
More support from UK welfare system
Changes in family structure
Greater scrutiny of insurance industry
Advances in technology
Pressure on income affecting affordability
What used to be the biggest reason for consumers not taking our life cover? What is it now?
Used to be “I cannot afford it”
Now “I have not thought about it”
What is a major reason why consumers favour buying financial products online or via telephone rather than seeking out face to face advice from an adviser?
Lack of trust in financial advisers caused by newspaper headlines, advisers charging commission and robo advice
What is the formula for the protection gap?
The protection gap = (Income/capitals needed by loved ones) - (Existing individual and employer sponsored cover)
Why are consumers failing to take out sufficient cover even if they have sufficient knowledge? Name 2 reasons
Cover is too expensive
Consumers do not trust providers to pay out claims
What is mortality, what insurance products is this mitigated by, what happens if mortality increases?
The risk of death
Term, endowment, whole of life
If mortality increases so do premium rates
What is morbidity? What insurance products is this mitigated by?
Risk of illness
Critical illness cover, income protection insurance and long term care insurance
What personal factors might influence which policies a person might take out for themselves?
Needs
Budget
Personal views
What additional distribution channels are there nowadays as well as door to door salesmen?
Single-tied advisers, selling one insurer’s product
Multi-tied advisers, selling from a panel of insurers
Independent or whole of market advisers, selling products form the entire range of insurers
What is the retail distribution review?
Who was it carried out by?
When was it launched?
When was it implemented?
The RDR was a market review which changed how retail investment products are sold
Carried out by Financial Services Authority with Financial Services Skill Council
Launched in 2006, legislation implemented 31st December 2012
What were the aims of the RDR?
Name 3
Ensure advisers have higher levels of technical knowledge and understanding
Raise standards of financial advice
Increase consumers confidence
Help align financial advisers with other professionals
Attract and retain higher quality recruits to the industry
Heighten public awareness of roles played by financial advisers
How did the RDR change the way consumers pay advisers? What is an exception to this?
Moved away from charging commission to advice-fee system
Financial protection advice and product recommendation is one area where commission can still be charged
