Chapter 2 - External Environment Flashcards
(18 cards)
List all of the external environment factors need to be considered
CREATE GRAND LISTS
Corporate structure
Risk management requirement
Environmental issues and climate change
Adequacy of capital and solvency
Tax
Economic outlook (underwriting cycle)
Corporate Governance
Regulation and legislation
Accounting standards
Nuthing
Demographic trends
Lifestyle consideration
International practice
State benefits
Technology
Social and cultural trends
Legislation and regulation
- Legislation is law declared by parliament.
- Regulation (more in depth in chapter 3) is form of secondary legislation that take account of circumstances or factors.
Differs in authority, purpose, level of detail and enactment
Purpose of legislation and regulation
PRESFIC
Protect the customer
Reduce financial crimes
Ensuring fair competetion
Supporting economic growth
Maintaining financial stability
Ensuring compliance with internal standards
Promoting market confidence
State benefits
- There are two aspects to this:
o Individuals may need to provide less for themselves: The individual will only need to fill in the gaps that the government is not catering for.
o There may not be a saving incentive: For low-income individuals, the benefit might deter them from saving because the saving they accumulate may reduce the benefit, they are eligible for (in mean-tested scenario)
Aims of state benefits
SPHERE PM
Social protection
Political stability
Promoting health and education
Economic stability
Reducing inequality
Equity and social justice
Encouring the participation in market
Moral and ethical responsibility
Corporate Stucture
Mutual societies
* Have no shareholder and profits belong entirely to policyholders.
* Should provide better benefit than proprietaries since they don’t issue dividends.
* Disadvantage in that it cannot raise capital in the capital market.
* Mutuals may offer specific distribution of surplus to their members.
* May design products with the lowest margins
Proprietaries
* Public companies benefit from easier access to capital and economies of scale and more dynamic management than mutuals
* Even private companies have owners who have access to additional capital.
Environmental issues and climate change
- Transformation will mitigate some of the future physical risk of climate change.
- Also present greater risks and opportunities in shorter term due to economic transitions.
- Unplanned urbanisation may lead to overcrowding and the spreading of diseases associated with overcrowding such as cholera.
- Extreme weather due to rising sea level will put major cities across coastline at risk of even such as hurricanes and typhoons.
- However, smart climate-smart cities may be built and afforestation encouraged to reduce the effect of greenhouse gas emissions.
- Climate change will bring opportunities as there will be more risk to be covered by the insurer.
Life Style consideration
- Younger members of population have high demand for loans and mortgages and less demand for savings.
- Older members have usually paid off loans and thus have started saving.
- Retired individuals have a need for an annuity to fund their lifestyle.
- As individuals move from accumulation of saving to decumulation they will prefer more secure investments and avoid volatiles one unless they are well off
International practice
- Providers may need to look to international market to see if products sold in other countries could be replicated in their own country.
- This may be difficult due to the difference in tax and legislation in different countries
Technological changes
- Advancement in technology mean that you can bank completely online.
- Many insurance products are sold online.
- Pricing websites allow customer to compare the different premiums.
- Insurance companies increasingly use websites to:
o Capture enquires from clients (reduces cost of hiring call centre agents)
o Record changes to clients’ personal details.
o Register claims.
o Perform another admin task. - Has led to improvement in medical care which effect the pricing of health care products.
- Lower income industries are being penetrated using mobile banking and online insurance to offer microinsurance like products
Demographic changes
- Rising life expectancy and declining fertility will have an impact on the main providers of benefits on contingent events.
- The effects of an ageing population include:
o This could lead to a high dependency ratio with less working people than retired people.
o Since older people prefer saving money this could lead to deflationary pressures on the economy.
o Greater strain on the social welfare because of increase in state pension received.
o Cost of healthcare will increase drastically as older people need medical care more frequently than younger people.
o The cost of education will decrease since the population is older. - Climate change could affect demographic in the following ways:
o Mass migration from area with higher risk of natural disaster.
o Increased morbidity and mortality because of it effects.
o Increase incidence of diseases in some area
o Increased conflict and wars
Changing cultural and social trends
- Greater demand for mortgage after home ownership become more widespread.
- Greater demand for health products if state cuts state health benefits.
- Increased in demand for savings products because of individuals having spare income
- Investing in eco-friendly companies to appease customer that the company is progressive.
- Increase use of telematics
Underwriting cycle
Insurers
* Top of cycle: Profitable business -> more insurers enter market -> premium rates reduce -> reduce profits/losses -> Cycle in depression.
* Bottom of cycle: Insurer leave since premiums are too low -> premiums increase to cover loss incurred.
* Speed of cycle depends on position of leading insurers.
* Loss at bottom of cycle could lead to loss of business and a reduce solvency position.
Banks and the business cycle
* When interest is high there will be increased demand for saving products and a decrease in demand for borrowing.
* In a stronger economy (lower interest rates) the opposite is true.
Corporate governance
- Refers to the high-level framework within which a company’s managerial decisions are made.
Aims - Companies should be managed efficiently to meet the requirements of its stakeholders
- Concern from regulators is that management may make decision based more on their personal interest rather than those of other stakeholders.
Strategies - Good corporate governance is enhanced by ensuring that remuneration incentives management to act in the best interest of the stakeholders. (using share options)
- Share option do not have sufficient downside so they could be a problem.
- The use of non-executive directors will facilitate good corporate governance.
- The governance arrangements of the product provider have a major influence on the way in which stakeholder needs are addressed.
- Uses King IV report in South Africa.
Risk management requirements
Designed to identify, assess, and mitigate risks that could impact an institution’s operations, solvency, or reputation.
* Good management of risk -> less provision needed to be held
Capital adequacy and solvency
- Capital adequacy: Ability to maintain sufficient capital to cover potential losses and absorb risks.
- Solvency: Assets are adequate to enable it to meet its liabilities.
- Capital adequacy > Solvency.
- Minimum standards of governance and risk management may be required by authorities.
- This includes capital adequacy and maintaining the minimum capital requirement.
- Increasingly, due to increase in computing power, states are moving towards risk-based capital requirements, instead of formula-based approach, such as Solvency II.
- Risk-based means that the excess of provisions depends on the amount of risk taken. The higher the risk, the higher the capital requirement.
Accounting standards
- The way benefits schemes need to be reported in company accounts will influence the type and range of benefits that employers are prepared to provide for their employees.
- They may change the wrapper in which a benefit is presented due to accounting standard requirements.
Taxation (External Environment)
May be taxed on benefits, contribution, accumualtion and inheritance tax
