Chapter 4 Flashcards
(21 cards)
Examples of financial needs:
- To pay off any debts owing
- To save for retirement
- To save for a house purchase or to pay off a mortgage
- To protect yourself/ any dependents against sickness, death, unemployment
- To protect your household contents against theft
Types of provision:
- Social security
- Financial products
- Contracts
- Schemes
- Transactions
Social security benefits types
retirement pensions
medical care
income support sure to unemployment, illnesses, or disability
housing support due to low income
child support
long-term care support
- Pension funds meet the need:
For income in retirement
To increase income in realn terms
Protect against financial impact of death
To accumulate assets for other reasons e.g. paying off mortgage
Benefit schemes:
- In return for a series of monthly payments, the provider will pay an individual or any policy dependents medial costs or unemployment in line with the scheme rules.
- These contracts tend to be short-term and are annually renewable.
- Funded by contributions members and employers and participation may be compulsory or voluntary
- How medical costs can be paid out:
Full amount billed (fee-for-service basis)
Capped amount according to a fixed tariff schedule
Fixed amount irrespective of the cost or type of health event
Investment schemes:
- Investment schemes involve an individual paying a single payment or a series of payments to a provider with the expectations that a higher amount will be paid back at a later date. E.g. unit-linked, collective investment schemes such as investment trust companies and unit trusts.
Derivatives:
- A financial instrument whole value depends on the value of other investments (shares, bonds) or variables (interest rates, exchange rates [swaps])
- Used to pass risk to a third party.
Insurable principles:
- Insurable interest
This is the policyholder having interest in the claim event not happening
Prevents moral hazard, fraud. - Pre-funding
Individuals or corporate bodies putting money aside in advance of the occurrence of an uncertain risk event
How much money to be place aside depends on the probability of the risk event occurring, amount thr risk will cost and the return that can be earned on the pre-funded money before the risk event occurs. (this also determines the premium charged) - Pooling of risk
Reduces volatility or uncertainty
Has operational advantages
More cost effective (less admin costs, sharing fixed costs, larger pool of assets to invest)
Retirement communities:
- Originated as religious organisations into which members would contribute their available assets in return for lifetime care.
- Idea developed to provide different levels of continuing care (Continuing Care Retirement Communities) according to the levels of initial and annual contribution
Microinsurance:
- Offers coverage to low income households (individuals with little savings) compensation for illness, injury or death
- Requires a low premium and insurers benefit from pooling large volumes of such business.
Customer needs:
- Important to differentiate between a customer’s logical and emotional needs and between their current (triggered by an event that has an immediate effect on customer’s circumstances) and future needs (relates to a customer’s future aspirations)
- Access to information or lack of financial literacy (vulnerable stakeholders) could impact how needs are perceived and prioritized by the customer
- Fact find – process of analysing and prioritizing financial needs
- A customer’s logical needs can be analysed as follows:
Maintaining a current lifestyle
Protection
Accumulation for a purpose
Accumulation for a purpose as yet unknown
How do you make a risk insurable? (7)
changing term of cover
risk sharing
restore equality of information
compulsory vs voluntary
grouping with other cover
control of distribution channel
specialist risk pooling
Forms of benefits? (3)
-indemnity
-lump sum
-income stream
Types of sum assured (5)
-fixed - sum assured stays constant throughout term of policy (certainty hence less risky)
-escalating - increases by a fixed percentage to keep up with cost of living
-with-profit - guaranteed sum assured that increases with annual bonuses declared by the insurer depending on the performance of the with-profit fund
-index-linked - sum assured increases in line with an inflation index to maintain real value over time
-unit linked - benefit depends on the value of the investment units the policy is linked to. It may include a minimum guaranteed sum assured plus the value of units.
Properties of without profit policies (4) :
Benefits are fixed at the outset
Guaranteed, non-discretionary in nature
Main purpose – protection
The policyholder has the greatest certainty of benefit amount
from this policy type
Properties of with-profit policies (3) :
-Policyholder is entitled to receive part of the surplus
-Usually distributed in the form of bonuses, which increases
the benefits
-Policyholders pay a higher premium, but expect to gain a
higher return
-There is a guaranteed amount of the benefit before bonuses are added
Properties of unit linked policies (4):
-Contracts with a significant investment element
-Unit-linked contracts work by paying policyholders’ premiums
into pooled investment funds
-Value of investment component “linked” to performance of
chosen fund units
-On death, sum assured is the greater of a guaranteed minimum
benefit and the value of the accumulated units
Properties of index-linked policies (3) :
-Benefits guaranteed to move in line with an index (e.g. some
retail price index) specified in the contract
-Protects the policyholder against the erosion of the value of
benefits as a result of inflation
-Premiums may be fixed in monetary terms or may move in line
with the same index
factors to consider when -setting levels of bonus on a with-profit policy
-keep profits back to smooth benefits from year to year
-policyholder expectations
-competitors
-regulatory limits
