Chapter 4 - Financial Products and Consumer Needs Flashcards Preview

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Flashcards in Chapter 4 - Financial Products and Consumer Needs Deck (21)
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1
Q

Benefits can be categorised as (5)

A

o Benefits for immediate consumption (mortgages for house purchase, loan for short-term needs)

o Benefits from the accumulation of disposable income and capital (CIVs, whole life ass., endowment ass., fixed term savings, immediate/deferred annuities, bank savings a/c)

PREDICTABILITY OF TIME & CERTAINTY
o Benefits on events unpredictable - both whether and when they might occur (critical illness, redundancy, fire, theft)

o Benefits on events predictable in time (retirement, loan repayment, school fees)

o Benefits on events certain to occur but unpredictable in time (death)

2
Q

What are the 5 types of benefit provision types?

A
  • Financial Products
  • Social Security
  • Contracts
  • Schemes
  • Transactions
3
Q

5 Financial product categories

A
  • Insurance contracts
  • Reinsurance contracts
  • Pension schemes
  • Investment schemes
  • Derivatives
4
Q

Financial product - Pension scheme

A

Involves accumulation of funds paid out on later date, for example retirement, death or withdrawal from the scheme.

5
Q

Financial product - Investment schemes

A

Involve an individual paying a single payment or series of payments to a provider with expectation that a higher amount will be paid back at a later date.

6
Q

Financial product - Derivative

A

Financial instrument whose value depends on the value of other investments or variables.
Can be used by providers of financial products to pass on risks to 3rd parties.

7
Q

Financial product - Insurance contracts

A
  • For a single payment (or series of payments) the provider will pay an individual or his/her heirs an agreed amount that start or end of a pre-specified event.
  • This event may happen to the individual, the individual’s property or a 3rd party.
8
Q

Financial product - Reinsurance contracts

A
  • Providers of insurance products can cede some risks written to third parties through reinsurance contracts in return for paying a reinsurance premium.
9
Q

Provision - Social security benefits

A
  • VARY CONSIDERABLY under different states wrt:
    o Form/level of benefits offered to citizens
    o Whether they are means-tested
  • If social security benefits are means-tested SAVING & alternative private provision may be DISCOURAGED
  • These benefits are subject to POLITICAL RISK that the State changes or withdraw benefits the following year
10
Q

Outline the needs of customers that may be met by pension schemes.

A
  • Accumulate assets to provide income in retirement
  • To increase this income in real terms in order to maintain standard of living
  • Protect against the financial impact of the death of the member, both before retirement (eg lump sum death benefits) and after retirement (eg spouse’s pension)
  • Accumulate assets for other reasons (eg lump sum at retirement to contribute to paying off mortgage loans)
11
Q

What are the main principles of insurance & pensions that impact the design of financial products and their benefits?

(Insurance Principles)

A
  • Existence of insurable interest (prevent moral hazard)
  • Risk pooling (Cost-effective pooling of finances to protect against uncertainty which may exist in cost of financing benefits)
    o Could be done by retirement communities or microinsurance
  • Pre-funding of risk {EXYEND THIS LATERON}
    o Need to put money aside in advance of contingent event uncertain in: timing, cost, incidence (will it even happen?)
    o Also need in incorporate individuals risk appetite (acceptable probability of desired outcome not being achieved)
    o Key issue: How much money is needed to provide benefits with desired probability?
12
Q

How does attitude to risk play a key role in the individual’s decision?

A
  • Risk-averse individual will prefer protection against future events even at the expense of a worse immediate lifestyle
  • High-risk individual will prefer to work on the assumption that rare events will not happen to them and to address such events when they occur
    o They use money to enhance their immediate lifestyle instead of making provisions
13
Q

Why group provision may be more cost-effective:

A

It may be more effective as there can be benefits of economies of scale in:

  • Provision (eg sharing of fixed costs)
  • Administration costs
  • Investment (as there is a larger pool of assets to invest)
14
Q

Types of needs to differentiate for customers

A
  • logical and emotional needs

- Current and future needs

15
Q

Give three examples of emotional needs:

A
  • Wanting more benefit than is needed
    o Individual may believe there is need to generate additional income in retirement from investment capital.
    o On analysis, it may be shown that additional income req. on retirement is much less than perceived
  • Need for spending money today on enjoying oneself
  • Providing overly generous death benefits for dependents
16
Q

3 classifications of a customer’s logical needs

A
  • protection,
  • accumulation for a purpose
  • accumulation for a purpose as yet unknown out of any remaining disposable income or capital
17
Q

Emotional needs

A

The result of what a customer thinks is needed or wants

18
Q

Current need

A

One triggered by an event that has an immediate effect on a customer’s circumstances

19
Q

Future need

A

May be one that relates to a customer’s future aspirations.

20
Q

Logical needs approach

A
  • Involves establishing customer’s needs, analysing & prioritising
  • Fit the benefits or products provided to those needs
  • RECONCILIATION b/w products & needs
21
Q

MUST STILL ADD TO THIS CHAPTER

A

YES!