Question 1 – Learning Outcome 1 (10 marks)
MC plc has established an effective distribution channel, which services many of it's customers, however the way in which customers purchase insurance is constantly evolving, and it is important for insurance companies to be at the forefront of the evolving changes, in order to capture an excellent distribution of the market.
One way that MC plc could achieve this is to use the internet to advertise their insurance products. The development of the internet has become a significant means through which insurance is transacted (Butterworth, 2018: 1/11). MC plc should explore the internet as a modality for advertising their insurance product to reach a wider base of customers and to also build the status of their brand and develop customer trust.
Given that the internet is a popular choice for customers to choose their insurance cover, the internet could be considered as the most appropriate distribution channel. Bhattad (2012) states that consumers use the internet to easily obtain information regarding insurance products, and notes that younger customers use the internet to interact, communicate and transact with insurers, therefore removing the “human” contact of the traditional insurance distribution. This view therefore supports the notion that MC plc. should explore using the internet as an effective distribution channel. However, it must be noted that although the internet provides a wide customer base it also increases the challenge of competition with other direct insurers who are also penetrating the internet market. MC plc will need to conduct a review of their products in comparison to the market to identify how well their products will perform in the wider internet-based insurance market.
MC Plc should ensure that they have an appropriate marketing campaign to take to market at the same time as releasing their product via the internet. By using an appropriate marketing campaign, MC plc, will be able to attract a diverse range of customers. MC plc should look to utilise social media platforms such as Facebook or Twitter to penetrate the market with younger “Millennial” clientele. Balinas (2015) states that advertising through Facebook with access to some 1.5 Billion monthly active users will expand the outreach to potential customers, particularly millennial's. MC plc, should take action to increase budget for an attractive marketing campaign to make the best use of the internet as an additional distribution channel.
MC plc, should also take some action to identify whether their products are appropriate for the internet market. Consideration for the pricing and the coverage of the insurance should be used against other similar insurance products available within the market, particularly those products that are available on the internet. MC plc, should identify whether the pricing is fairly priced for the coverage that it provides in comparison to the market. This will then enable MC plc to adjust their product for a suitable customer base that it aims their insurance products to. Adjusting the pricing will provide a competitive edge for MC plc in comparison to other products in the market, and will allow MC plc to penetrate a wider customer base by providing a suitable priced product with a diverse and far-reaching customer base.
Question 2 – Learning Outcome 2 (20 marks)
Management information (MI) is a vital aspect to the successful management and control of an organisation, without such information decisions about the future directions of the organisation cannot be effectively made (Butterworth, 2018: 3/15). Within most insurance organisations, there is a multitude of MI available covering for example, financial positions and current value of claims, the selection of the most important data is vital for the future success of the organisation.
EJ plc currently transacts its business across many countries, one piece of MI that could be used is MI regarding the countries that it currently transacts in and other countries that could be targeted for further expansion. MI regarding the restrictions within each country will allow EJ plc. to develop a strategy for propositional growth and customer acquisition. It is important that EJ plc understand the business laws of the countries that it transacts in as this will inform the market penetration to aim for whilst trying to maintain a level playing field for consumers and businesses alike. EJ plc are likely to already use external information which will inform them of current market positions which could impact the acquisition of customers. EJ plc, should use this strategic information to inform propositional developments which is likely to attract new customers to their business.
It is important for EJ plc to retain its customers whilst also trying to acquire new customers, the experience of the customer is a key indication of whether a customer will choose to remain with a company or choose to leave. A key piece of tactical information which EJ plc could use is data surrounding the Net Promoter Score (NPS). An NPS score is a key piece of feedback that organisations use to gain insight in to the customer journey. Cook (2012) states that a negative experience might force a customer to choose to leave an organisation due to the customer service they received. This type of tactical information is usually used for decision-making to control the current environment (Butterworth, 2018: 3/16). Therefore, EJ plc should look to utilise this information to understand key failings within the customer journey and look to implement changes for the benefit of the customer. By identifying areas of improvement and implementing changes, EJ plc can deliver a better customer experience and customer retention is likely to improve.
EJ plc, should look to use both types of MI, strategic and tactical, to inform the strategy and development of future propositions in order to successfully acquire and retain new customers.
1. EJ plc, has grown through the acquisition of other insurers which has resulted in the ownership of several MI systems that are not integrated. This is a key challenge facing EJ plc and could be detrimental to maximising the opportunities available to EJ plc. The lack of integration across the systems can have a severe impact on knowledge sharing, document management and codification of data (Butterworth, 2018: 3/18). This is a key issue facing EJ plc as it does not allow for uniformity in the codification of data across the organisation, nor does it allow for simple and effective knowledge sharing which could be of use when trying to collaborate and share information for best practice across the whole organisation. EJ plc, should look to integrate its technology systems in order to effectively manage it's strategic and tactical objectives.
2. A further challenge that EJ plc faces is that the organisation has recently suffered several senior management resignations which impacts the organisations ability to manage knowledge and information. This is a serious challenge that EJ plc faces and could have serious ramifications for the future strategic planning for the organisation. By suffering several resignations this impacts the effective management of information and knowledge held within the organisation, which would be used to inform key strategic decisions (Butterworth, 2018: 3/16). Strategic planning will be compromised unless EJ plc act quickly to recruit competent colleagues who are confident with complex sets of data, by facing in to this challenge, EJ plc could maximise their opportunities as long as this challenge has been effectively managed.
3. EJ plc is also likely to face challenges in how it chooses to communicate its customer information and customer knowledge, this is made more complex when it is known that EJ plc also operates in a number of countries. The quality of the content of communications is a key challenge facing EJ plc, it is essential that clear and unambiguous wording is used for communications to avoid issues following communications from colleagues and customers (Butterworth, 2018: 3/17). EJ plc should ensure that the dissemination of information is a core focus for future use of customer information and customer knowledge in order to make key decisions regarding both the strategic and tactical futures for the organisation.
4. Knowledge management is a key challenge facing EJ plc, currently EJ plc transacts in a number of countries which can add an extra complexity when considering the aim of knowledge management is to redistribute an organisations collective skills for the benefit of the organisation (Butterworth, 2018: 3/18). By sharing information in this manner EJ plc could attempt to employ a personalisation strategy to their organisation, where knowledge is shared through direct person-to-person contact and structured training (Butterworth, 2018: 3/18). If EJ plc were to choose a personalisation strategy, the widespread nature of their organisation across many countries could hinder the effective use of customer information and customer knowledge.
Question 3 – Learning Outcome 3 (20 marks)
Operational risk can be defined as the risk of loss from inadequate internal processes, people and systems (Robertson, 2016). As with many organisations, LRM plc face a multitude of risks on a daily basis, in an operational viewpoint two significant risks that LRM plc face is the risk of a cyber attack and the adequate protection of customer data and company systems.
Cyber-security is a key risk that has become more ubiquitous within organisational risk agenda's, the risk of a cyber attack and advances in how organisations are being attacked is a current major threat and is considered a key operational risk. A close competitor to LRM plc, has recently suffered a cyber-attack resulting in loss of competitors data, this is a key operational risk for all companies, LRM plc included. Data loss can be highly damaging to companies, all organisations have a duty not to divulge confidential information and to safeguard this information from fraudulent use (Butterworth, 2018: 4/17). Customer data security is a key operational risk that organisations must face, Culp and Thompson (2016) estimate that cyber risks translates to a mean annualised cost of over £7million. It is clear that the risk that LRM plc regarding customer data security is a constant threat, it is vital that LRM plc monitor this threat closely in order to comply with the Data Protection Act 1998, which prohibits the unauthorised disclosure of records stored in any way, meaning that companies must guard against hacking of their databases intensively (Butterworth, 2018: 4/18).
An additional operational risk that LRM plc face is the adequate safeguarding of customer data and company systems. LRM plc currently allows colleagues to work remotely from the office locations, this is a potential key operational risk to the safeguarding of customer data. Butterworth (2018: 4/19) states that a key risk is that confidential information has left the organisation's controlled environment, which increases the risk of unauthorised disclosure or loss. Green (2015) states that home workers are a greater risk to an organisation and are an easier target for hackers to attack and obtain customer data. It is therefore vital that home workers have the same level of security in place at home as they would in an office environment. Customer data security is a key operational risk to companies, LRM plc should ensure that appropriate controls are in place to combat such risks to the safeguarding of customer data.
Cyber attacks and customer data security are two important operational risks that organisations must be prepared for, it is imperative that these risks are accepted in to the organisations core risk agenda and appropriate measures are put in to place to protect the organisations integrity and customer data.
A Key Risk Indicator (KRI) is a key piece of information that provides details of the risks inherent within a business and the type and effectiveness of controls in place (Butterworth, 2018: 4/13). KRIs provide an accurate picture of the control environment that is in place and can allow for detailed analysis between losses and inherent risks (Cruz & Peters, 2015). LRM plc, should use KRIs to explore the effectiveness of the risk controls that they have in place in order to protect the business from potential losses.
One KRI that LRM plc should use to monitor customer data security should be to identify the number of hacking attempts. This is a KRI that specifically refers to the threat of cyber-hacking, and therefore can inform LRM plc of potential attacks. By reporting on the number of hacking attempts, LRM plc can identify how successful their current controls are and potentially analyse any causal relationships (Cruz & Peters 2015). By using this type of data, LRM plc can develop their current controls as a result of identifying weakness within their control, for example strengthening firewalls to protect systems and therefore protect customer data.
Additionally, LRM plc should gather information regarding IT downtime as a KRI, the use of this data will inform LRM plc of the causal relationship between the downtime and a potential weakness that could lead to a hacking attempt. By identifying potential causes, LRM plc will be in a position to develop additional tools to protect customer data. This type of KRI will allow senior management to investigate the circumstances and review the effectiveness and adequacy of current controls in protecting customer data (Butterworth, 2018: 4/14).
A further KRI that is essential to safeguarding customer data that should be employed by LRM plc, is software to identify emails being sent out of the organisation with attachments. A KRI of this type will allow for senior management to identify the number of emails sent externally with potential breaches of customer data and identifying any colleagues who are potentially putting customer data at risk. This is an important KRI in safeguarding customer data and should be used to provide feedback to colleagues, senior management will be able to identify if controls in place are currently effective and will also identify colleagues who potentially need to undertake mandatory training to understand the important of customer data security.
Finally, LRM plc should also gather data relating to the number of home workers. This KRI will provide details regarding the number of home workers and will inform the current view of the risk of potential customer data being leaked. This is an important KRI and should be used to ensure that the colleagues have undertaken appropriate training and have access to the same standard of security software that is used within the office environment. A KRI of this nature is understanding that the controls in place are working effectively to protect customer data and that colleagues who are allowed to work from home can be trusted with customer data and are not a potential threat to the organisation.
KRIs are an important indicator to an organisation of the current effectiveness of controls in place to appropriately safeguard customer data. The nature of KRIs will change as new risks are identified within the organisation, however, a key focus should always be to protect customer data and identifying potential weaknesses within an organisation.
Question 4 – Learning Outcome 4 (20 marks)
CMA plc. has identified that pricing inconsistency has led to inaccurate calculations of pure risk premiums, pure risk premiums could be inaccurate due to:
Policies sold through the internet - When a policy is purchased through the internet, the process is automated and removes the personal interaction with a broker (Butterworth, 2018: 5/7). A potential issue with providing policies through the internet and indeed, a reason premiums could be inaccurate is that the internet can allow a client to misrepresent the risk that they actually possess. Removing the human interaction could lead clients to misrepresent their risk in pursuit of lower premium prices.
Inaccuracy of information provided - transacting via a telephone can be a potential risk for CMA plc, when selling policies via the telephone, the underwriting assistant will take the customer through set questions to capture the essential information required for the quotation (Butterworth, 2018: 5/7). A key risk that CMA plc should consider is whether the pre-set questions actually capture the information required to give a holistic view of the risk that the customer would like insured. If the questions do not address the risk in enough detail this could lead to problems regarding the pricing of policies.
Delegated Authority - many insurers allow some form go underwriting to be carried out by outside entities (Butterworth, 2018: 5/8), by delegating the underwriting to an external entity, CMA plc must ensure that appropriate measures are in places to monitor the pricing of its policies. A key risk regarding the inaccuracy of policy pricing could be that underwriting policies are not being adhered to and the agent is incorrectly selling policies at the wrong premium rate.
Peer Review - Peer reviews or supervisor checking can be crucial to for accurate premium processing. Butterworth (2018: 5/7) states that complicated commercial insurances are likely to be peer reviewed, whereby a policy pricing is reviewed by an independent underwriter. This would suggest that not all quotations are checked by a peer or supervisor and therefore issues regarding the calculation of the policies could arise. CMA plc, could look to utilise this method of peer-reviewing to ensure further accuracy of their policy pricing.
Underwriting Manual - In commercial business, the policyholder will usually be required to supply a comprehensive pack of information so that quotations can be obtained with full disclosure (Butterworth, 2018: 5/7). A key risk that could be at play regarding the underwriting manual could be that the underwriter might not appropriately understand the risk and therefore, by misunderstanding the level of risk, incorrect premiums might be priced.
CMA plc, should consider using both the actuarial and risk functions in order to assist in setting accurate pure risk premiums.
Actuaries use financial and statistical techniques to solve business problems, particularly those involving risks, actuaries use data to look at future event, the likelihood of them happening, when it might happen and the associated costs if that event were to happen (Hughes, 2018).
The actuarial department are vital in providing support to the underwriting team, this is particularly relevant in General Insurance where actuaries can predict loss ratios, for a book of business, based on a range of factors including past performance and external risks (Butterworth, 2018: 5/13). The role of the actuary from a General Insurance perspective is to monitor changes in the underwriting performance and make adjustments to the predicted loss ratio (Butterworth, 2018: 5/13). This is important as the loss ratio will inform the underwriters on how best to price the premium. CMA plc, should look to utilise the actuarial department to inform how best to price it's premiums.
Furthermore, actuaries are also vital for the financial performance of the company. Actuaries are essential to accurately reserving funds for claims, by doing so actuaries can use current trends to inform how much money needs to be reserved for claims during the financial year (Butterworth, 2018: 5/13). Actuaries are also useful in complex risk scenarios such as natural disasters, by undertaking risk modelling an actuary can predict the risk exposure to a portfolio. By using this information, actuaries can work with the underwriting team to inform how best to set premiums.
CMA plc, should work with the actuarial team to understand how best the current risks facing the business can impact the premiums that need to be set. It is clear that the actuarial team can provide informed advice on the pricing of premiums relevant to the current risk environment.
Risk management is an important asset to any insurance business, many insurance companies began to develop the risk management roles within they organisations to begin to capitalise on the benefits that risk management can bring to a business (Butterworth, 2018: 5/14).
The risk management team within CMA plc, should be used to assist the underwriting team to ensure that accurate pure risk premiums are being produced. One process that the risk management team will follow is to identify risks, and more appropriately review the processes that underpin the premium pricing procedure. Butterworth (2018: 5/15) states that the purpose of risk identification, in process analysis, is to identify potential dependencies on every aspect of business processing. CMA plc, could identify key processes that are not working, or could have dependencies that lead to errors, if this is the case, CMA plc, should look to use the risk management team to identify potential risks and how best to manage these within the business.
The risk management team will also undertake risk analysis of all of the risks within a specific category. This is vital to understanding the probability of that risk ever happening and the impact this will have on the company (Butterworth, 2018: 5/15). By doing so CMA plc, will be able to use the risk management team can work with underwriters to create more accurately priced premiums and therefore, help to overcome the issues they are currently facing.
Question 5 – Learning Outcome 5 (30 marks)
PNE plc, is currently in the process of reviewing a delegated authority agreement with BMU plc, PNE plc only transacts with insurance brokers that it considers financially secure. On review of the financial information provided by BMU plc, PNE plc should investigate a number of issues.
Number of staff. It is clear within the financial information provided by BMU plc, that in 2016 the number of staff had reduced in comparison to 2015. This is problematic when considering the salaries of staff had increased in 2016 in comparison to 2015. It is of interest to PNE plc to explore how the net reduction of 34 colleagues can increase salaries by £1m. To illustrate this point, it is important to look at the average salaries across 2015 and 2016:
2015: 11m/314 = £35,031
2016: 12m/280 = £42,857
An increase of this figure across a year is concerning to PNE plc, without a clear explanation, with a decrease in staff it is expected that expenditure on salaries would also decrease.
2. Cost of Finance - Hutchinson (2018: 6/17) states that finance costs are the cost of loans made to the company such as bank loans. This is an interesting issue that PNE plc should be aware of prior to entering into a delegated authority relationship with BMU plc. In 2015, BMU plc has finance costs at a total of £0.35m which subsequently rose in 2016 to £0.45m. This raise in finance costs is interesting to PNE plc, as it suggests an increase in borrowing by PNE plc. It is therefore prudent for PNE plc to understand the details underpinning the increase in borrowing by BMU plc and whether this could, in the future, indicate any potential financial issues that BMU plc could be facing. Prior to entering in to a relationship, PNE plc, should investigate this financial issue further to understand how it could impact them in the future.
3. Operating expenses - Bragg (2017) states that operating expenses are those expenditures that a business incurs to engage in any activities not directly associated with the goods or services. For example, this might cover utility costs, legal fees, pay, pension contributions and office supplies. Upon review of the financial information provided by BMU plc, it is clear that the operational expenses decreased by £600k to £4.6M in 2016. Although this is predicted with a drop in staff levels, it is of interest to understand the reasons behind the decrease in operating expenses. PNE plc, should investigate this decrease in operating expenses to understand the decision making process behind the decrease. If the decrease is relative to annual cost-savings, this could indicate to PNE plc, that there could be some financial difficulties facing BMU plc.
4. Profit before taxation - Hutchinson (2018: 6/17) states that profit before taxation is the total income earned on any investments, after all business costs are subtracted, prior to corporation tax being deducted. BMU plc, have provided their financial information to PNE plc, which reports a net reduction in profit before tax of £0.31M from 2015. It is key to understand the reasons behind the reduction in profit year on year, and what key drivers have lead to this reduction. This will inform PNE plc of the current risks and issues facing BMU plc and whether these risks could impact future financial performance, and therefore illustrate to PNE plc whether they should enter into a delegated authority relationship with BMU plc.
5. Broking Commission and Fees - Hutchinson (2018: 6/17) states that the main revenue for insurance brokers is the commissions they receive from the insurance companies with which they place business and the fess they receive from their clients. This is an interesting piece of information the PNE plc should review when considering the potential relationship with BMU plc. In 2016, BMU plc faced a reduction of £0.8M to £19.2M from 2015, which demonstrates that BMU plc faced a loss in respect to brokering commission and fees received from clients. It is important to understand the reasons behind this reduction in commission and fees as it can illustrate current issues facing BMU plc. The reduction could indicate a loss of business which can be concerning when considering entering a new relationship with PNE plc. PNE plc, should investigate the cause of the losses across the financial year prior to entering in to a business relationship with BMU plc.
When considering a potential new relationship with BMU plc, PNE plc should request the following essential financial information:
Current Assets - PNE plc should request information relating to the current assets of BMU plc, Hutchinson (2018: 6/13) states that current assets refer to items of wealth that the business controls and intends to use within the next twelve months, for example cash, stock and debtors. PNE plc, should be aware of the current cash position of BMU plc in order to determine whether a business relationship is advantageous to PNE plc.
Income and expenditure - Details of the yearly financial reports is essential to understanding the current and previous financial position of BMU plc. By using this information, PNE plc, can identify information regarding the premium income and what the company currently spends its money on for example, raw materials, wages and operating costs (Hutchinson, 2018: 6/7). This is advantageous for PNE plc to use to identify whether PNE plc are financially astute enough for them to enter into a business relationship.
Liabilities - PNE plc should request financial information from BMU plc relating to its current and non-current liabilities. Hutchinson, (2018: 6/14) states that current liabilities are loans that are required to be paid within 12 months and non-current liabilities as debts that need to be paid in a period longer than 12 months. Considering BMU plc's previous financial history, it would be advantageous for PNE plc to understand any liabilities that could impact the financial position of BMU plc. Understanding the financial position of BMU plc, is essential for PNE plc to decide whether to enter into a business relationship with BMU plc.
Shareholder's equity - It is beneficial for PNE plc, to understand the current stake that shareholders have within BMU plc. Shareholder equity as stated by Hutchinson (2018: 6/8) is the total value of all the assets in the business less the total value of all the liabilities. Shareholder equity is important for PNE plc to identify the current strength of BMU plc's business and whether this indicates a strong financial performer to enter into business with.
Solvency Measures - PNE plc should also request information regarding the solvency margin of BMU plc. Hutchinson (2018: 6/8) states that the solvency margin is the amount by which the value of an insurers assets should exceed the amount of its liabilities. PNE plc must understand the capital that BMU plc holds and whether this is in excess of its solvency margin. This is a key indication of the financial strength of the company and whether PNE plc should enter into business with BMU plc.
Question 6 – Learning Outcome 6 (10 marks)
R&J plc, currently face a problematic issue concerning claims reserves for flood damage to properties for which R&J plc provide a number of insurances to. One issue that R&J plc currently face is that they are approaching financial year end, and therefore the cost of the claims will be spread across two financial years. This is due to claims incurring expenses that are likely to be longer tail due to the severity of damage that floods can cause.
With this in mind, the most appropriate method for calculating the total claims reserve for these claims is to use the Bornhuetter-Ferguson method. Hutchinson (2018: 8/6) states that the Bornhuetter-Ferguson method allows for a combination of the loss-ratio method with an expected loss development. Given that the loss is expected during the next 2 months with further claims form policyholders, it is advantageous for R&J plc to use this method to understand and predict the total claims reserve that should be allocated. Investopedia (2018) states that the Bornhuetter-Ferguson method estimates Incurred But Not Reported (IBNR) losses during a period of time by estimating the ultimate loss for a risk exposure and then estimating the percent of this ultimate loss that was not reported at the time. This is an effective method as it allows for the losses to be spread appropriately across a time frame, and therefore R&J plc, can effectively reserve the predicted set of claims reserve for the flood damage claims.
Once R&J plc complete their calculations, and have appropriately modelled with regard to long tail cases, R&J plc should set aside the amount anticipated to be required when the claim is paid, and therefore take into account inflation (Hutchinson, 2018: 8/7). Ultimately, R&J plc should use the Bornhutetter-Ferguson method to appropriately calculate their claims reserve across a period of time, this is particularly relevant when considering that they currently face the year end financials and also are likely to be impacted by further claims running in to the next financial year. By spreading the cost and reserving appropriately, R&J plc are likely to spread the cost of the claims efficiently.
R&J plc have stated that the total claims reserve is likely to exceed the unearned premium reserve, and therefore this can have implications to how the claims reserve for the flood will be funded. Hutchinson (2018: 8/4) states that the unearned premium reserve is the amount set aside to cover the expected cost of claims. It can be argued that the flood that R&J plc are currently covering is not expected and therefore, it is likely that the reserve cost will exceed this figure. By doing so, R&J plc should have an unexpired risk provision set up to cover the current liabilities (Hutchinson, 2018: 8/4) and therefore, cover the remaining costs that R&J plc face. Using this method, R&J plc can fund the claims reserve of the flood claims.
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