Institute of Actuaries of India

Subject CT9: Business awareness Online Course

Pre-course assignment of 7 exercises

There are seven exercises within this workbook which you must complete. You must also complete
the declaration on Page 1 of this assignment and then upload the workbook at IAI website under your
member login

You need to submit the completed assignment by 17th May 2013 under your IAI Member login.

Any assignment which is not submitted will not be eligible for the exam and you will have to apply to
take the exam again. You may commence your work on these exercises at any time before the start
of, or during, the 10 day business game period.

Contents

Exercise 1.............................................................................................................................................. 2
Exercise 2.............................................................................................................................................. 6
Exercise 3.............................................................................................................................................. 6
Exercise 4............................................................................................................................................ 16
Exercise 5............................................................................................................................................ 31
Exercise 6............................................................................................................................................ 36
Exercise 7............................................................................................................................................ 41
 IAICT9 - April 2013

GUIDELINESFORSTUDENTS

Pleasereadtheinstructionsbelowandsignthedeclarationbeforesubmittingthecompletedworkbook.

1. ThisworkbookisintendedtoprovidepreparatorymaterialfortheCT9 Online course

2. Youareexpectedtocompleteallsectionsofthisworkbookpriortoappearing the online examination
3. Pleaseensurethatthecompletedworkbookisuploaded on IAI website under your member login
by17 t h May 2013
4. Ensurethatyoucompletethisworkbookinallearnest–
youranswerswillbereviewedtoensurethatareasonablestandardhasbeenachieved.Thisisapre-
requisiteforappearing the online examination.
5. Youwillbegivenfeedbackonthequalityofyourworkpriortotheexam.
6. YouarepromptedtoadheretotheActuarialCodeofConductwhileattemptingthisworkbookandthe
reafter.Itiscriticalthatallworkthatyousubmitisyourown.Plagiarismofanykindwillbetreatedseriou
slyandconsideredabreachofexaminationregulations
7. Youmustsignthedeclarationbelowstatingthatthisisyourownwork.

DECLARATION
IdeclarethatallmaterialIhavepresentedinthisworkbookismyownworkandthatIunderstandanydeliberatea
ctsofplagiarismaredeemedtobeinbreachofexaminationregulations.

NameDhawalRajaniDate – 17/05/2013 Sign

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Exercise 1
Financial Services Companies
Having studied the tutorials on the I-coach website, and identified some relevant news items in your
own country’s newspapers or magazines.

How do financial services companies create value for customers – that is, what
underlying needs are they satisfying? Think about:

Channelizing of savings – The financial services help customers to save for future by
channelizing there savings into investments.

Exposure to bigger market – These companies provide customer with exposure to

bigger and efficient market to create a better investment portfolios.

Growth Facilities – Financial service companies such as bank provide loans on the
basis of some underlying securities or past records.

Investment Needs – These companies provide security and safety of funds. This may
be in the form of guaranteed returns or may involve some kind of speculation based
on market movements.

Meeting up obligations/Responsibilities – These companies help customer to meet

their obligations and responsibilities. These may be in the form of obligation to meet
the business payments or receive of funds or responsibilities of financial security
provided by individual in case of uncertain future.

Risk and Uncertainty – These companies guarantee for risk and uncertainty for future
unforeseen events.

Other – financial service companies provide various other kinds of benefits also such
as banks providing ATM or Locker facilities. They may also act as an agent in
business transactions. Etc.

Why does anyone place their funds in the hands of financial services
companies?

Exposure to Bigger and Standardised Market – These companies provide advantage

to customer for bigger and much more standardised market. This can help in earning
greater returns on investments.

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Expertise Advantage. – These funds are in the hands of expertise who knows when
where, How to invest.

Minimising and Diversification of Risk – The customer enjoy the benefit of minimising
and diversification of risk through large scale business of investment company.

Channelizing of savings – The savings are channelized into efficient investments

resulting in better returns.

Hedging for future uncertainties – These companies’ hedge investors or customers

against future market movements and uncertainties.

What sources of advantages can financial services companies use to create

value for customers?

Economies of scale – This is the advantage a financial service company gets due to
large scale of business they operate.

Pooling of risk – These company pool the risk which helps in minimising and
diversification of risk

Exposure to Bigger Market – These companies

Diversification Options – These companies can diversify their business into different
areas resulting in better market opportunities and explorations

Expertise Knowledge. - This is one of the main advantages of financial service

companies that they have expertise knowledge, employee and management working
in these companies have years of experience and qualification.

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How do financial services companies capture value from the customer for
providing services? i.e. in which ways can they generate profits?

Diversification of Investments – they may diversify their investment into different

market, segment and sectors.

Economies of Scale- these are benefits which a firm enjoys due to large scale
business such as better utilisation of fixed cost etc.

Charges and Commission for services rendered by them - the main sources for
income for any financial company is the charges and commission charged by them to
render the services. this may be in the form of

Loading factors – This talks about how their business is set up. For e.g. bank
provides loans at a higher rate and gives lesser return on savings, thus making a
profit.

What factors have been changing the levels of profits companies can gain from
specific types of products or segments of the market?

Market Competition – Rise in the market competition has led to decrease in per unit
profits.

Rational Consumers - With the consumer being rational the expenses the marketing
has risen, so is the level of elasticity of the product.

High Cost – The diversification of business has led to incur of heavy cost which is
one of the key element in squeezing of profits.

Regulations – the strict regulations by the government and serving bodies has also
led to change in the profit level trends.

What external factors are now having an impact on customer needs and how do
companies serve these needs? What will change in the future?

Globalisation – the globalisation has led the world closer and so has led the rise in the service
industry leading to higher safety and security needs.

Availability of options/Choices – the availability of options/choices is rising and with is

expected to rise more in future, resulting in more consumer oriented products.

Competition – the competition is rising and with that more and more innovative products
would be launched n near future. This can lead to an efficient market.

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How do financial needs change in relation to an individual’s life stages in adult life?

Young adults

1) Higher needs to spend for lifestyle, Fashion.

2) Generally more speculation requirements as no obligations and responsibilities
3) Education and career advancement needs.
4) More bound towards spending then towards savings.

‘Building family’ stage

1) Higher Transactional Needs
2) Financial Responsibilities towards family , kids . e.g. buying a term insurance or child
care plan.
3) Rational Towards Risky Investment and opportunities
4) Capital Asset Building

Middle age
1) Plan for Retirement benefits
2) Transfer income into investment.
3) Precautionary needs.
4) Health Insurance.

Retirement
1) Higher Precautionary needs
2) Protection of Capital

Are these life stages as predictably linked to typical age ranges as they once were?

The life stages are changing with the passage of times these may be due to the
following reasons.

1) Medical Advancement and awareness

2) Globalisation leading to change in lifestyle and standard of livings
3) Divergence of values , cultures and principles

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Exercise 2

Financial Services Industry

Having studied the Financial Services Industry slides and notes (Item 5 on the Preparatory Study
page), describe in the financial services industry proforma in 900 to 1100 wordscorresponding
matters applicable to your own country.

(The answer below is based on the following assumption).

{Pro forma can be defined as hypothetical financial statement showing assets and liabilities, or
income and expenses that may be recognized in the future. Pro forma statements also can illustrate
projected earnings if a company were to merge with another, or sell off part of its operations}

In case of financial service companies the projection of assets and liabilities are done with different
financial and investment techniques. The basic reason for these companies using such complex
techniques is due to the nature of the business they operate in. The financial service is required to
manage complex source of finances from complex areas the major reason for difference in pro
forma for them is as follows:

1) Estimation of future cashflows – the financial organisation must estimate its future expected
cashflows. This may be either anticipated by choosing a right blend of quantitative and
qualitative factors these may be based upon the from the past year trends keeping in mind
the future market expectation. They cashflow will include the expected projection for future
anticipated revenue and cost.
2) Method of Accounting – The method of accounting for financial service company is specific
to industry. In India also method of account differs in case of bank and insurance
companies. Principle of prudence and going concern is kept as a benchmark in decision
making .For eg in case of an Insurance organisation the sources of initial incomes is
premium, So generally the revenue is received in initial years this may make the balance
sheet of insurance company look lucrative in the initial year causing it an adverse damage in
the later years. So it is important to use appropriate method to forecast the right future
positions.
3) Reserving – The main agenda or principle on which financial service industry work is on the
basis of reserving. Reserving is future expected cashflows at time 0. It is important to note
that the discounted present value of reserves should work well with the values of the assets
available to the business. As there should be enough assets to back the future liabilities. In
case of Insurance Company the expected payouts are in future and it must be important to
back enough of reserves to payout for future obligations.
4) Interest rates Assumptions– The interest rates in the market can be volatile and may affect
the future market till be great extent extent .A sudden rise of decline in interest rate can
disrupt the entire future projection of the business. For eg Bank offering loans to consumer
at lower rates and change in interest rate working against the bank which may result in
losses.
5) Diversification risk – The diversifying of financial services into different countries can lead to
change due to high level of currency risk.
6) Valuation of Assets – The financial company does generally have different set of assets as
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compared to manufacturing industry. The funds in the form of assets are diversified into
various investment opportunities which may be long term. The return for these assets may
be uncertain and may involve high level of risk so it is important to find the right value to
book for the assets
7) Statutory requirements by governing body – In case of financial service there is always
statutory body governing the right for the customer. This body may prescribe
Professionallegal and ethical aspects on one hand to statutory financial requirements on the
other. For eg. The mutual funds can discount there income at lower rates to get show better
reserving strategy but they may be manipulating there statements to achieve confidence of
the consumer. Therefore statutory body prescribe certain band of assumptions which may
be applicable.
8) Unforeseen Future Market – The market the company is operating into is quite unforeseen
and may affect the future expectations.

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Exercise 3
Strategic thinking
Having studied the tutorials on the I-coach website, complete the strategic thinking exercise indicated
in the table below according to the month of your birthday.

The month of your Your exercise

birthday

January Exercise A: page 7 of this workbook

February Exercise A: page 7 of this workbook

March Exercise A: page 7 of this workbook

April Exercise A: page 7 of this workbook

May Exercise B: page 17 of this workbook

June Exercise B: page 8 of this workbook

July Exercise B: page 17 of this workbook

August Exercise B: page 17 of this workbook

September Exercise C: page 8 of this workbook

October Exercise C: page 8 of this workbook

November Exercise C: page 8 of this workbook

December Exercise C: page 8 of this workbook

Exercise A
I have completed exercise: – Grid B

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Exercise 3: Using strategic concepts

Exercise A – Briefing note

The business issue: developing premium rates in a capped environment.

The Scenario

You are a senior product manager in VAULT, a financial services company established in 1980.
VAULT offers a very wide range of mass-market Savings and Protection products. Through most of
its history, it has enjoyed steady growth and profitability.

This has been because of:

 A brand reputation built over decades. High awareness of its brand has allowed it to
command a significant premium over identical or similar competitive products.
 Healthy profit margins arising from the different types of charges on its products and the
recurring nature of some of those charges.
 The fact that some long term products are difficult for consumers to switch out of, once
purchased.

However, in recent years, VAULT’s situation has gradually become less comfortable due to factors
affecting the industry as a whole. Costs of selling and administration have risen significantly, even
more than the average rise for the industry. Internal discussions on this identified the reasons as
being:

 The breadth of its product portfolio, rising costs of staff training, and technology costs for
record keeping.
 The various way charges are levied, to make them more acceptable to end customers.
 Investment in building distribution through superior Brokers, offering them a variety of
commission structures and above-average commissions.
 Increasing costs of complying with legislation.

This was not a concern when financial markets were growing especially the equity markets. As
earnings from charges relate to the value of assets under VAULT’s management, rising costs were
covered without improving efficiency or market share. However, the last few years brought far
different conditions: a long market downturn affecting the value of assets; less new business due to
low consumer confidence in the markets and providers; and increasing scrutiny of the retail finance
market by the government.

Government interest is driven by its need for people to be financially independent, hence reducing
their reliance on the State. Unfortunately, a review the government initiated on the level of
competition in the retail finance sector did not indicate consumers are rushing to increase their
purchases of financial products. The Review found the consumer to be in a weak position vs.
providers, and that it was this very weakness that determined how the industry was structured and
operated.

The review concluded:

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 Competitive forces in the industry do not work effectively to deliver cost efficiency or value for
money to consumers.
 Savings levels are insufficient, especially among the less well off, in part because of the high
cost of serving this segment.

The Review stressed that in truly competitive markets, companies are forced to offer value for money
whereas in retail finance, relationships between the price and quality of products are inherently
difficult - or impossible - to assess. This is largely because frequently product and advice costs are
bundled together in ways not transparent to the consumer.

As financial sector players had little incentive to change this ‘status quo’, the government set in train
various steps aimed at rebalancing the level of power between consumers and financial providers and
to meet two top line objectives:

1. To increase competitive intensity in the industry, creating greater pressures for price and
quality improvements.
2. To make savings more accessible.

The steps towards this included:

 Quasi regulation in form of simpler products – the introduction of capped charge

‘standardized’ products with criteria for their product terms set down by government.
 Consumer education – including tables published by the Insurance Regulator to help the
media and consumers to compare charges made by providers for competing products.
 Initiatives to govern industry conduct – especially in how the sales process is handled and
information is provided to customers.

Overall, these influences have created an environment where, in the words of one senior VAULT
executive, it is ‘change or be changed’. This is already occurring to some extent. The introduction of
‘standardized’ capped-charge products resulted in some providers lowering charges on similar
products.

As the industry had little to gain by wholeheartedly promoting these standardized products, there is a
growing feeling that the government must take further steps to push its own vested interest in seeing
these, or equally good value products, made more widely available. In fact, your Chairman has
received clear signals that a company of VAULT’s standing will be expected to be showing a good
example…

Ranjeet Kumar, the director responsible for life assurance, has called you to join a discussion on the
implications for the business in light of these developments.

As the government thrust is to encourage more transparency on the price and quality of products and
services, Ranjeet has drafted out his thoughts on potential price/quality positions in the market.

Ranjeet’s honest appraisal is that currently many of VAULT’s products would fall into a ‘premium
price, average quality’ position. The danger is these will be exposed as not offering good value as
comparative information becomes more widely available. Research has shown that consumers are
paying the VAULT ‘brand premium’ due to familiarity rather than any deep attachment.

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Ranjeet also says some VAULT products sit in the ‘medium price, average benefits’ position. The
challenge for these - and for VAULT overall if it tried to move further into this position - would be in
justifying charges higher than those for ‘Standardized products’. The government will ensure the
Standardized products offer at least average benefits at a low price, making them better value than
any similar products which are priced higher. In any case, given the government’s objectives, it is
likely the pressure will be on VAULT to offer Standardized products itself.

Ranjeet’s draft of potential market positions, based on ‘price/quality’ relationships.

Price
HIGH LOW
HIGH
Premium price
Medium price Low price
High benefits
High benefits High benefits
VAULT future?

Low price
Premium price Medium price

Benefits
Average
Average Average
benefits
benefits benefits
‘Standardized’
VAULT products VAULT products
products

Premium price Medium price Low price

Poor benefits Poor benefits Poor benefits

LOW

If the market polarises into the segments Ranjeet has examined of:

1. Premium price, high benefits products and services

2. Streamlined, low price ‘standardized’ products

this will have big implications for VAULT.

For the future, Ranjeet is asking the team to consider the two different competitive positions he has
identified – for the ‘premium price/high benefits’ and the ‘low price/average benefits’ position for
Standardized products. (See above)

What you need to do

You must consider some of the issues Luke wishes to explore. Then you must complete Grid A, Grid
B or Grid C depending on your day of birth as follows:

Your day of birth The grid you must complete

1st to 10th Grid A
11th to 20th Grid B
21st to 31st Grid C

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Grid A: Look at the aspects of competitive positioning in the left column of Grid A(i). Consider how
the issues in the scenario may have implications for customers, product/service, geographic area,
channels to market and level of vertical integration. Enter your thoughts about the implications in the
right hand column of Grid A(i)

Set out in Grid A(ii) what you consider to be the existing sources of competitive advantage in respect
of the items in the left hand column.

Grid B or Grid C: Use the right hand column of Grid B(i) or Grid C(i) to enter ideas on what VAULT
would need to do in order to build the proposed competitive position described.

Think about what potential sources of advantage would be needed to compete in these positions.
What existing sources of advantage does VAULT have now, and could it use them to compete in the
new position(s) described? Enter your ideas in the right hand column of Grid B(ii) or Grid C(ii).

It is usually difficult to compete in both high price and low price positions at the same time, as they
can require very different sources of advantage. So you need to consider if there are some
capabilities or advantages relevant to both ‘premium’ and ‘Standardized’ segments – perhaps if they
are used in different ways to create customer value for each position?

VAULT Company Background

Established in 1980 and headquartered in the Mumbai. VAULT operates in Urban, Semi Urban and
Rural areas.

Originally selling only through its extensive direct sales force, in the past fifteen years it changed its
distribution methods to also offer its products through ‘bancassurers’ and Brokers.This was partly due
to the rapid increase in product variants it created, often to take advantage of the varied tax
treatments levied on different products. These then required higher skills in those selling them. In the
past ten years, the number of staff in its direct sales force has reduced, and it has made considerable
efforts to extend the breadth and depth of its relationships with Broker firms and Bancassurers. It has
pursued this distribution aggressively, paying some of the highest commissions in the business.

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Grid A (i)

Reviewing VAULT’s existing competitive positioning and issues affecting it

Existing Competitive
How issues outlined in case may affect positioning decisions
Positioning

Customers
Broad base of ‘mid
market’ customers.

Product/Service
Very broad product
portfolio

Geography
Currently operates in
Urban, Semi Urban
and Rural areas

Channels to Market
Access to end
customers is through:
 Brokers networks.
 Retail outlets
(Bancassurers in
city centres).
 Direct to the
customer (direct
marketing).
Level of Vertical
Integration
Where is the company
active in the industry
Value Chain? Which
functions are ‘in house’
and which are ‘out
sourced’?

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Grid A (ii)

Existing sources of competitive advantage

Superior
Assets

Distinctive
Capabilities

Strategic
Relationships

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Grid B (i)

Competing in a ‘premium’ position

Competitive
How would you compete in this position?
Decision:
Target audience with high income level.

Target audience with different or special needs.

Customers

Target customers with high standard of living.

Expert/ separate consulting

Issue product with higher tax benefits

Product/ Service
Better rider options.

Focus on market covering large geographical area.

Diversifying into untapped area.

Geography

For people to whom product is not unknown personal selling though

sales executive or customer relationship centres

Advertisement for large scale business.

Channels to Market

Promotional techniques to attract new customers.

Research and innovation to improve better quality products.

Ensure that customer relationships are maintained. New customer

Level of Vertical relationship offices are made by ensuring enough time and attention.
Integration

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Grid B (ii)

Building competitive advantages for a ‘premium’ position

How could existing advantages help the company compete in a ‘premium’ position? (Or be used to
build new advantages relevant to this position?)

Goodwill generated so far can act as a deep advantage in tapping for new
market.
The current pool of large asset can act as a backbone to diversify into the
market.
This can help to minimise and mitigate risk further as the concept of
pooling of risks work in more efficiently.
Superior
Assets

Expertise in Skills – High level of educated and experienced individuals

can help thing for better and innovative ideas.

Data Advantage– The current warehouse of data could be most added

advantage to the organisation. This can help to ensure premium position.
Distinctive
Capabilities
Customer feedback – Taking surveys of customer products and services
could help in controlling and decision making process.

Strengthen relationship with the customer.

Sound reputation in financial markets.

Relationships with the stakeholders.

Strategic
Relationships

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Grid C (i)

Competing in a market for ‘Standardized products’

Competitive
How would you compete in this position?
Decision:

Customers

Product/ Service

Geography

Channels to Market

Level of Vertical
Integration

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Grid C (ii)

Building competitive advantages for a ‘Standardized products’.

How could existing advantages meet the key success factors for competing in market for
‘Standardized products’? (Or how could they be used to build an advantage relevant to this market?

Superior
Assets

Distinctive
Capabilities

Strategic
Relationships

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Exercise 3: Using strategic concepts

Exercise B – Briefing note

The business issue: educating consumers about why values of funds fluctuate
and affect their pensions and investments.

The Scenario

You are the spokesperson for LifeSage, a major Life insurance company. Publicity continues to
highlight the fact that growing numbers of endowment (both Unit Linked and With profits)
policyholders are being disappointed by the value of their accumulated fund at its maturity date
compared with the projections they had received when taking out the policies. Often, they are also
given significantly different figures within a short time frame between asking for projections in the run
up to the maturity date, and the final figure they are quoted. In the light of growing criticism, you have
been asked onto a TV consumer programme to explain, on behalf of the financial sector, why fund
values can vary so greatly from projections.

You know that fund values fluctuate for varied and complex reasons, but you suspect the interviewer
will try to focus solely on the charges and performance of companies such as LifeSage, which
marketed the policies and managed the funds.

As a condition of appearing on the programme, you have told the producer that while you will
acknowledge points they may make about the financial sector, your key aim will be to explain the
external factors that affect fund values and are beyond the control of the providers.

The producer has stressed you should not make the message too complex for a general TV audience
and that your airtime is limited, so a few key messages will have more impact than a mass of facts
and figures.

A colleague has suggested your message might be more memorable if you took a broader view than
purely economic factors. A useful way to think about this might be to use the PEST framework
(political, economic, societal, technological shocks impacting businesses), to think about how to
explain the different influences at work.

You previously asked a junior executive assistant in your team to gather some research material and
some key points have been collected, but currently it is a jumble of facts and issues and the assistant
has now had to move on to another task.

So you now need to sort through the headlines to identify the most significant underlying issues that
have affected policyholders whose funds are reaching maturity now and in the next five years. If you
think there are more significant factors than are reflected in these headlines you can use your own
ideas in your message.

What you need to do

1. Read the summary of recent ‘headlines’ gathered from newspapers by your executive
assistant – see below. The Below headlines are just to give an idea of what may be
possible reasons for the fluctuation. The student is expected to come up with at least 2
reasons not covered in the headlines.

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2. Look at the PEST framework document to help you identify the underlying issues that have
led to both the topical newspaper headlines provided as well as the reasons that the student
has identified. Identify which are major factors that have an impact on the value of funds.
3. Use the template provided to note the two or three most important factors in each of the PEST
categories that you would mention in your interview and why they have had an impact on fund
values.

Newspaper headings

Do you know where your money is invested – equities, bonds or fixed deposits? Consumers
urged to learn more about the funds their investments are in, to better understand their future
prospects.

Financial Index now unbalanced by market value of major company representing high
percentage of the index value – what does this mean for tracker funds?
Exceptional growth in Japan raises value of specialist regional funds.

Will ‘with profits’ investors be without profits in future, as so-called ‘smoothing’ effect is
defeated by poor market returns?
Low deposit rates attract cautious investors into bonds.

Government raises limit for premium bonds – and cash keeps flowing in from savings looking
for wins.
Increasing regulatory demands increase cost burden in financial companies.

Savers suffer, but borrowing breaks previous records to make the most of low interest rates.

Demand for equities increases prices – is this the start of the next bull market?
Public spending set to overshoot by many thousand crores – government gets ready to issue bonds to
finance borrowing.

Financial companies sell equities to ensure they meet new solvency requirements.
Politicians tell us to expect a low-inflation future – but our perceptions are shaped by our high-inflation
past.

Key Highlights of the Union Budget - Government Introduces a Securities Transaction Tax.
Growth in Indian equity markets expected to lag behind other world regions.

Technology – administration of funds may become more streamlined, therefore saving costs.
Consolidation in finance sector expected to reduce costs - but major players spend more on winning
customers.

Computer virus wipes millions off corporate profits…and share values.

Personal savings ratio in urban India drops to lowest level in 10 years, as consumers’ attitude to debt
and security changes.

Funds that sold shares in bear markets now miss out on rising markets.

Government orders financial companies to speed up compensation payouts for mis-selling.

Computerised Exchanges have raised interdependence and volatility of markets.

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Borrowers facing interest rate hikes.
Commodities rise in value as growing markets suck in raw materials for manufacture.

On-line services help individuals manage their own investment portfolios.

Diamonds& agriculture land. …Investors head for anything other than conventional savings.

Money moves from quoted companies to small ventures as investors look for higher growth.

The PEST framework

The following is a breakdown of sub-issues within the PEST framework. Use it to help you identify
underlying factors that have led to the newspaper headlines you have been given and which may
have a major impact on the values of a fund.

i) Political/legislative factors
 Government attitude to anti-competitive practices and public interest
 Health and safety issues
 Environmental controls
 Trade regulations
 Employment law
 Tax regimes
 Government stability

ii) Economic factors

 The stage of the business cycle
 Growth trends
 Inflation
 Money supply
 Rates of unemployment
 Disposable income
 Cost of energy and base materials

iii) Societal factors

 Demographics
 Income distribution
 Polarisation of income
 Welfare needs
 Social mobility
 Life style changes
 Attitudes to work/leisure
 Education levels
 Consumer power
 Ethics

iv) Technological trends/shocks

 Discoveries/innovations
 Speed of technology transfer
 Rate of obsolescence
 Government investment
 Incentives to industry sectors

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PEST Factor Why the factor may have an impact on the value of a fund

Political /
Legislative

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PEST Factor Why the factor may have an impact on the value of a fund

Economic

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PEST Factor Why the factor may have an impact on the value of a fund

Societal

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PEST Factor Why the factor may have an impact on the value of a fund

Technological

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Exercise 3: Using strategic concepts

Exercise C – Briefing note

The business issue: treating customers fairly

The Scenario

You have just been promoted to acting CEO of AZURE, a market leader in general insurance with a
particular strength in property policies.

The Communications Director has asked you to help arrest damage being done to the company brand
by media commentators running a story about a claim AZURE is refusing to pay out on. The angle for
the media coverage is to contrast AZURE’s current behaviour versus its new advertising campaign,
based on the bold claim of being ‘the nation’s favourite insurance company’.

The problem revolves around a group of customers who held AZURE insurance policies covering their
buildings and home contents. The customers lived in a newly-built block of flats built on a site of
reclaimed land. Recently, extreme weather conditions and heavy rains had caused flooding, which
led to some land slippage beneath the foundations of the flats.

AZURE were advised of the situation immediately and gave the go-ahead for emergency work to
quickly underpin the building and prevent much greater damage. The Managing Agent paid for the
work from the residents’ management account, and subsequently lodged a claim with AZURE.

The construction company for the properties had negotiated a group deal with AZURE, and had
bundled the first year’s buildings insurance in a package of other benefits offered ‘free’ to buyers of
the 50 flats. This saved each of the householders the equivalent of Rs. 5000. All the customers had
taken up AZURE’s offer to add contents insurance to their policy, at an average extra cost of Rs.
5500. At the time, AZURE’s sales unit were pleased, as they estimated it normally costs the company
around Rs.1000 to sign up a new customer.

However, AZURE’s claims investigators soon revisited the site and, on closer examination with other
experts, concluded that the construction company had cut corners when preparing the land and the
building’s foundations. This meant some declarations the builder made when negotiating the bulk
contract were not accurate and AZURE declared the contract invalid and stated this released them of
any liability. The builder was contacted, but disputed the finding and denies any responsibility.

The Director of Claims says that the company’s lawyers advise that AZURE is within its rights not to
pay out if a declaration made on the contract was untrue. He also says this also makes the Contents
insurances invalid – because if AZURE had known the risks to the building, they would not have
underwritten the contents business. He further emphasises his position by pointing out he is following
the company’s stated objectives – to put shareholders first. Shareholders’ interests are not served by
making payments on large claims when these can be avoided. Not only that – payouts on claims also
affect future premiums. This claim for the building underpinning is Rs. 1 Crore – a significant sum!
On top of this, combined contents claims from the 50 flats total around Rs. 12 lakhs.

This implies a payout per policy of over Rs. 2 Lakhs and, even if their renewal rates were raised
above the average increase of 5% per year, it would take years to recoup the payouts on these
policies.
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The Communications Director, however, disagrees strongly. She states that the householders were
unaware of the risks, had believed they had buildings cover and had bought their contents policies in
good faith. As such, they should not be treated as if they had tried to cheat the company.

Another point the Communications Director makes is that after the media coverage, 550 customers
called the helpline in one day, trying to clarify cover and payout conditions on their own policies, and
indicating they are unlikely to renew if AZURE treats customers as has been reported.

The Marketing Director noted this is not unexpected, and said: ‘one satisfied customer tells three
others, one unhappy customer tells 11 – but that’s without using the mass media to tell their story.
We get most ‘customer satisfaction’ stories from people where we’ve actually resolved a problem, and
then they stay with us long beyond the 5 year period averaged across most customers.’

Both the Communications Director and the Marketing Director think it is best to pay out on the policies
and take action to recoup the costs from the builder.

You have spoken to the legal department yourself and they’ve advised you that the builder could be
pursued for negligence – but why not leave this to the householders? There is also some doubt that
the house builder could afford to pay, so the money may never be recouped. If you wanted to be
seen as a ‘favourite’ company, why not offer a small compensation – say Rs.10,000 – to each
policyholder but on the basis this was a gesture of goodwill, not an admission they hold valid policies.

Clearly, you face a difficult task in trying to please everyone, and you need to make some judgements
on how to balance the different suggestions that have been made i.e.

Option 1. Refuse to compensate customers, as there are grounds to argue the risk was insured
on the basis of inadequate information. You can also cite your duty to protect
shareholders’ funds.
Option 2. You could make a small payment per customer as a nominal gesture of goodwill,
while ensuring it was understood this is not admitting liability to pay.
Option 3. You could agree a statement to the media explaining that you are about to contact
each person affected to assure them their claims will be honoured.

What you need to do

Task 1

As acting CEO, you’ll be well accustomed to taking a view on what makes most overall commercial
sense for the company, based on top line information such as you have here.

Set out in Grid (A) your views on the advantages and disadvantages of each option.

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Grid (A)

Task 1: Should AZURE pay out on the policy?

Advantages:

Option 1
Disadvantages:

Advantages:

Option 2
Disadvantages:

Advantages:

Option 3
Disadvantages:

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Task 2: Realigning Azure’s Objectives

You can see the company clearly needs to review its objectives, as they seem to be encouraging
company executives to pull in several different directions. When you’ve tackled the claims issue, look
at AZURE’s existing objectives and think about why these may create confusion.
As acting CEO, you should take the opportunity to review if these objectives are really cohesive, and
think how you might better manage to communicate to staff a set of financial, strategic and non-
financial objectives that are mutually supportive and can guide decisions.
1. Consider the extracts you have on AZURE’s objectives, strategic intent, mission, strategy and
tactics, as set out in Grid (B).
2. Identify if they contain any contradictory aims.
3. Come up with a new top line objective and think about what impact this might have on
the other levels – suggesting changes as appropriate by setting them out in Grid (B)
under ‘Comments’.

Extracts from AZURE’s Staff handbook

To put shareholders first, giving them the highest return on investment

available in the general insurance sector.
Objective
For the next five years, create a year-on-year improvement in the margin
between insurance revenues and payouts.
Strategic Intent To be the nation’s favourite financial services company.
To offer the widest range of products in general insurance.
To continuously innovate in our processes.
Mission To make use of the most sophisticated technological aides in pursuit of our
profit objectives.
To conduct ourselves with integrity and win customer trust.
Strategy To proactively seek out low risk, high income customers.
Information sharing to avoid fraudulent claims. Use data warehouse for
customer profiling on past claims made across insurance categories.
Tactics Increase number of claims investigators.
Raise level of proof required for payouts and rigorous analysis prior to claims
payouts

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Grid (B)

Objective To put shareholders first, giving them the highest return on investment
available in the general insurance sector.
For the next five years, create a year-on-year improvement on the margin
between insurance revenues and payouts.
Comments:

Strategic To be the nation’s favourite financial services company.

Intent Comments:

Mission To offer the widest range of products in general insurance.

To continuously innovate in our processes.
To make use of the most sophisticated technological aides in pursuit of our
profit objectives.
To conduct ourselves with integrity and win customer trust.
Comments:

Strategy To proactively seek out low risk, high income customers.

Comments:

Tactics Information sharing to avoid fraudulent claims. Use data warehouse for
customer profiling on past claims made across insurance categories.
Increase number of claims investigators.
Raise level of proof required for payouts and rigorous analysis prior to claims
payouts
Comments:

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Exercise 4
Problem solving
Having studied the tutorials on the i-coach website that relate to problem-solving (see i-coach -
Introduction - Problem-solving, including the 'Explore' items), read the problem solving exercises
below.

Problem 1
Your 30th birthday falls due in 6 months. What celebration should you plan?

Problem 2

An insurance company is considering entering the annuity market. It plans to launch a variety of
products simultaneously like an immediate annuity product, a deferred annuity, and a joint life annuity.

What factors must the company consider to achieve a successful launch of its offering?

Problem 3

You are a consultant to a company that owns a chain of coffee shops in a large city, Coffeeville. You
have been asked to advise on whether the company should open a new shop in the neighbouring
town of Teatown.

What aspects would you cover in your report?

Problem 4

You work for a company that sells car insurance. The market is very competitive, there are many
providers in the market, and premiums are being driven down. Your own market share has been
reducing as follows:

Year Market share (%) Premium income (£m)

One year ago 20 190
Two years ago 25 200
Three years ago 30 220

Should your company advertise through television for the next year costing £1m per month?

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Problem solving proforma

Which problem have you chosen? Problem no 2

Go through the five stages described below, entering items in each of the tables.

STAGE 1: Generate a list of 25 issues/questions (divergent thinking) against the bullet

points below
 What will be competitive advantage to the product?
 What will be competitive positioning to the product?
 In which geographical area the product will be made available?
 What will be the pricing strategy?
 What will the product are promoted?
 What all services will be rendered?
 What is the size of the market?
 The potential buyers available in the market?
 The growth opportunities available in the market?
 How will the market segmentation be done?
 The current competition in the market?
 The barriers to enter and survive in the market?
 How well the consumers know about the products?
 Is the market seasonal driven?
 The cost factors involved in the business?
 How will the market moves and what are the future expectations?
 The elasticity of the product?
 When the product must be introduced ?(timing)
 What all will be the channel of distribution?
 What will be the target audience?
 What will be the leverage strategy?
 What all sales channel will be used?
 How financial planning will be done?
 What is the market image we will be focusing upon?
 What will the product features?
 How will the employee be motivated?
 How training and development of employees be done?
 What will be the capital investment strategy for the new product?
 Which method of capital budgeting will be used?
 What are the risk and returns associated with the product?
 How consumer behaviour influence the product?
 How does culture influences the product?

STAGE 2: Identify about 5 key themes within these questions and enter them against the
bullet points below
 Marketing
 Finance
 Strategic Management

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 Industry
 Consumer Behaviour


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STAGE 3: Arrange against the bullet, sub-bullet, and sub-sub-bullet points below, your
issues/questions from Stage 1 into top level questions and sub-questions based on your
themes in Stage 2
 Marketing
o Physical Distribution
 Channels of Distribution including barriers in distribution
 sales channel
o Product
 Product elasticity
 Product features and services
 Finance
o Financial planning
 Capital Budgeting
 capital structure
o Investment
 Risk and return
 Market scenarios
 Industry
o Competition
 Competitive advantage
 Competitive positioning
o Nature of Market
 Size of market
 Barriers and regulations.
 Strategic Management
o Human Resources
 Employee Motivation
 Training and Development
o Planning
 Decision Making
 Market research
 Consumer Behaviour
o Customer Relationship
 Target audience
 Potential buyers
o Nature of consumer
 Market segmentation
 Culture.

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STAGE 4: Refine your wording in Stage 3 to ensure no gaps and no overlaps (so mutually
exclusive, completely exhaustive). Suggest copy your points from Stage 3 into the table
below and then refine your wording
 Marketing
o Physical Distribution
 Channels of Distribution including barriers in distribution
 sales channel
o Product
 Product elasticity
 Product features and services
 Finance
o Financial planning
 Capital Budgeting
 capital structure
o Investment
 Risk and return
 Market scenarios
 Industry
o Competition
 Competitive advantage
 Competitive positioning
o Nature of Market
 Size of market
 Barriers and regulations.
 Strategic Management
o Human Resources
 Employee Motivation
 Training and Development
o Planning
 Market Image
 Market research
 Consumer Behaviour
o Customer Relationship
 Target audience
 Potential buyers
o Influencing consumer
 Services
 Pricing Strategy

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STAGE 5: Identify the dominating questions and the key hypotheses (no more than 3 of
each) and enter them against the bullet points below
Dominating questions
 What is the current potential market?
 What are the future prospects?
 What are the cost and competition prevailing in the market?
Key hypotheses
 What is the Strategy to be adopted?
 How to raise and utilise finance?
 What is the competitive advantage and position of the firm?

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Exercise 5

Case studies
Having studied the professionalism slides and notes, you are required to consider three case studies
in accordance with the table belowaccording to the month of your birthday. The case studies are on
the following pages.

The month of your Your case studies

birthday

January Case studies 1, 3 and 4

February Case studies 2, 4 and 5

March Case studies 3, 5 and 6

April Case studies 1, 4 and 6

May Case studies 1, 2 and 5

June Case studies 2, 3 and 6

July Case studies 3, 4 and 6

August Case studies 3, 4 and 5

September Case studies 2, 4 and 5

October Case studies 1, 3 and 6

November Case studies 1, 2 and 5

December Case studies 1, 2 and 6

1,4,6
I have completed case study numbers:

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Exercise 5: Case study 1 – Offer of gifts

Discuss the action you should take in response to the offer of one of the following from someone with
whom (directly or indirectly) you have a professional relationship.

(a) An initialled pocket diary.

(b) An invitation to a dinner party.
(c) Company products to the value of Rs 1000.
(d) An expensive suit piece at Diwali.
(e) A day at a major sports event, in the VIP box
(f) Invitation to dinner for your spouse and self.
(g) An all expenses paid Holiday in Goa for one week.

Consider separately the position of:

(i) An actuary employed by an Audit firm (the offer comes from the CEO of an Insurance company,
whose annual peer review is done by you).

(ii) An actuary employed by an insurance company (the offer comes from a reinsurer who wants to
do business with you).

(iii) A consulting actuary.

Case study 1 proforma

Enter the 2 most important points you can think of for each of the gifts (a) to (g) relative to any of the
positions (i) to (iii), indicating in each case which position you have used.
Gift Point Your view
(a) 1 Consulting Actuary - It could be a good business gesture.
2 Consulting Actuary - Since the financial value of the diary will be insignificant.
He/she can accept it.
(b) 1 Audit Firm -An actuary should not accept hospitability unless it is reasonable
in terms of frequency nature cost.
2 Insurance firm - An actuary can go however he should be beware of getting
Influencedor manipulated
(c) 1 Insurance firm - It could be method of brand promotion.
2 Insurance firm - It could be a way to better business relationships
(d) 1 All 3 - This could be way to impress or bribe
2 All 3- It could be unethical on the part actuary to accept.
(e) 1 Insurance Actuary - It could be to better the relationship
2 Insurance Actuary -On the other hand the party can try to manipulate the
actuary
(f) 1 Insurance Actuary - To build personal , informal relationship
2 Insurance Actuary -This can be an indirect way to influence to do business
(g) 1 All 3 - This looks leave the party to bribe the actuary and he shouldn’t accept
it.
2 All 3 - The actuary should not do anything unethical which can affect the code
of conduct.

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Exercise 5: Case study 2 - Privileged information

After a lively evening at an event organised by the Institute of Actuaries of India, following a sessional
meeting, you recall participating in interesting discussions on the following topics:

1. Mortality investigations.
2. Duties carried out by actuaries in your organisation.
3. Calculation of reserves on unit-linked policies.
4. General salary levels of actuaries in your organisation.
5. Current product development being undertaken.
6. Detailed bases of investment guarantee valuations you carry out.
7. Premium revisions to take into account higher commission rates and the taxation changes.

You learnt a great deal from these discussions which will benefit you (and your company). However,
you did notice that the voluble consulting actuary and the friendly reassurer prefaced all their remarks
and information with the phrase “one of my clients” or “I know of a company that” respectively, so that
it was never clear which company they were talking about. By contrast, every experience you related
inevitably referred to your own company.

How do you decide in discussions with other actuaries which subjects are professional and therefore
can be discussed openly and which are commercial and therefore secret? Please illustrate with
reference to the above list of topics.

Case study 2 proforma

Enter the 2 most important points you can think of for each of the 7 topics in answer to the question
posed by the case study.

Topic Point Your view

1 1
2
2 1
2
3 1
2
4 1
2
5 1
2
6 1
2
7 1
2

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Exercise 5: Case study 3 - Errors

An error is discovered in your work/another actuary's. What action do you take?

Case study 3 proforma

Enter the 5 most important points you can think of in answer to the question posed by the case study.
1
2
3
4
5

Exercise 5: Case study 4 - A friend of a friend

A friend’s father feels he will be worse offby the buyout of a minority (but significant) stake of his
insurerby another party. Your friend believes that you know something about how insurance
companies work and asks you to find out something for her father.What should you do?

Case study 4 proforma

Enter the 5 most important points you can think of in answer to the question posed by the case study.

1 We cancheck the reasonableness in the income statement and financial position of

the new organisation.
2 To check for company solvency position.
3 To ensure with the company that the buy-out doesn’t hamper the current benefit
associated to that policy.
4 To check for finding the reasons for the buy-outs
5 To make his father understand the meaning, nature and relevancy to the business in
a global competitive environment.

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Exercise 5: Case study 5 - Can’t sign / won’t sign

You are a senior experienced student providing reports for review by a qualified but less experienced
actuary. The less experienced actuary refuses to provide official sign off for your work. What should
you do?

Case study 5 proforma

Enter the 5 most important points you can think of in answer to the question posed by the case study.

1
2
3
4
5

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Exercise 5: Case study 6 - Working late

Joyeeta is Head of Marketing at the Householders Insurance co. Ltd. She enjoys her work, especially
working with her team who are lively, loyal and committed. The company is planning to launch a new
internet based motor insurance policy and her team is in charge of the marketing strategy across the
country. The Director of Corporate Communications has let it be known to Joyeeta that there is a lot
riding on the success of the new product, both the future of the company and her own position.

Despite this added pressure, the team has enjoyed putting together the marketing strategy, and
Joyeeta can honestly say they have all given 110%. Often they would stay late, order a take-away,
and brain storm until the early hours.

Launch week approaches, and several of the print adverts have not been approved by the Board. It’s
going to be a long night if Joyeeta and her team are going to make the changes needed and meet the
deadline for the key publications. If they miss them, the campaign loses an integral part of its focus.

The team groans when Joyeeta breaks the news to them, but on the whole they are good-natured
about it.

However, Sugandha, Joyeeta’s second-in-command, pulls her to one side.

“I’m sorry, Joyeeta,” she says,” I really can’t stay late tonight. It’s my son’s final exam and I need to
make sure he studies.”

Joyeeta tells her not to worry. She’s sure they’ll be able to get through without her. But then Baldev
asks her for a word in private.

“I’m afraid I can’t stay late tonight,” he says.

“Oh Baldev!” groans Joyeeta, “Please! We need you! Especially since Sugandha isn’t able to make it.
With two people down we’d never make the deadline! Please stay! I promise not to ask you again!”

Baldev reluctantly agrees.

Later, Aditya comes up to Joyeeta. “I couldn’t help overhearing your conversation with Baldev,” he
says. “I don’t know if you’re aware, but his wife’s in hospital and she’s being operated on this
evening.”
What are Joyeeta’s options?

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Case study 6 proforma

Enter the 5 most important points you can think of in answer to the question posed by the case study.

1 Joyeeta’s can give off to Baldev, as making him to stay will be unethical.
2 Joyeeta’s can make the team understand what Baldev is going through ,still ready to
stay up all night long , this can boost up the team motivation.
3 If there is an option for sugandha to work from home, Joyeeta could convince
sugandha to do that. Joyeeta canmake her understand the importance of the project
to them and to the organisation.
4 In order to enrich team enthusiasm,Joyeeta can also use different incentives
technique. She can promise financial and non -financial incentivises if the project
works out well.
5 This may not seem favourable, but given the importance of the product to the
organisation,She (Joyeeta) can approach for help tothe board of director stating them
with the current situation.

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Exercise 6

Business game proforma

Describe briefly in the table 10 business related points you have learnt, or increased your knowledge
of, as a result of participating in the business game.

1
2
3
4
5
6
7
8
9
10

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Exercise 7
Legal awareness case study proforma
You will need to work through the tutorials of Legal (trust, tort, contract & company) to comlete the legal
awareness case study proforma.

Select a minimum of 5 of the 10 questions below and,, enter a total of 10 key points in answer to the
questions posed with a maximum of 3 points for any particular question.

Charlesworth

You are an actuary employed by Charlesworth Consultants LLP, a firm of actuaries. Charlesworth has
just been instructed by the Balmoral Group Limited (“Balmoral”) to advise on a number of issues.

1. Please identify any potential liability to which you or your firm may be exposed in acting for
your clients (that is, who could bring an action against you and on what grounds?)

Point Your view

1 This breach of contract between the company and the Actuary.
2 The regulatory body in case of wrong governance
3

2. How might Charlesworth seek to limit any potential liability?

Point Your view

1 Issuing in written that the advice is based on assumption that the information is
correct to best of their knowledge
2 Signing of indemnity clause with the Balmoral limited.
3 Signing or restriction of liability on conditions

3. What restrictions are there on Charlesworth’s ability to limit its liability?

Point Your view

1
2
3

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Contract

4. You have a first meeting with a client. At what point might you enter into a contract with the
client?

5. You are at a party and in response to a request, promised to provide professional advice to
someone for a fee. Do you have a contract?

6. You agree to do work for someone free of charge. You then decline to do the work. Can the
other party sue you?

Point Your view

1 5 - In the party there is no legal contract or obligation signed between the party
and the Actuary, so this is not binding on the part of the Actuary.
2 6 - The work party can sue only given that a contract is signed between the
parties.
3 6 - The charging of work for free could be more of a social gesture which cannot
be binding on part of the Actuary
4
5

Tort

Six months ago, Charlesworth prepared an actuarial valuation report for Daltech Ltd in respect of its
defined benefit pension scheme. Charlesworth was negligent in preparing the report with the result
that the deficit on the scheme was significantly undervalued.

Last week, a director of Daltech asked Charlesworth for a copy of the report “for a corporate matter.”
The report was handed over. Apparently,, Daltech handed the report to Secco Ltd who used it to base
a valuation to purchase the entire issued share capital of Daltech.

7. Does Charlesworth owe Secco a duty of care?

Point Your view
1 The charlesworth is liable for breaking the code of conduct.
2 Charelsworth can limit the liability stating that the information provided were best
of their knowledge.
3

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Company law and trusts

Focal is having cash flow problems. Last week Focal sold land it owned to George Whale (“GW”), a
director and shareholder of Focal. The book value of the land was £200,000. The board agreed to sell
the land to GW for £120,000 for a quick sale.

The board of Focal have discovered that James Kear, a director who resigned six months ago has set
up his own business competing with Focal and is obtaining business from Focal’s customers

8. Do the directors of Focal face any potential liabilities if they continue to trade in the present
circumstances?

Point Your view

1
2
3

9. Is the sale of the land to George Whale open to challenge?

Point Your view

1
2
3

10. Is there anything the directors of Focal can do about the activities of James Kear?

Point Your view

1 Check for the transactions made by James kear during his course of business.
2 In case any fraudulent practices done by him during the course of business he
can be held liable.
3 Check for James financial methods for financing and starting for new company

*************************

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