M92: Insurance Business And Finance

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Question 1 – Learning Outcome 1 (10 marks

 You are a marketing manager for IJ plc, an insurer that underwrites professional indemnity insurance. IJ plc offers a wide range of professional indemnity insurance products for specific professions. IJ plc distributes its products through insurance brokers. Due to stagnating sales, IJ plc has decided that it needs to sell professional indemnity insurance through an additional distribution channel. 

(a) Identify, with justification, the most appropriate additional distribution channel for IJ plc. (4) (b) Recommend two actions that IJ plc should take to maximise the benefit of the use of the additional distribution channel, you have identified in (a) above.

1. Other than insurance brokers, IJ Plc can distribute its services through other distribution methods. One such distribution method is through the use of price comparison sites. Price comparison site (also known as aggregators) is an internet-based distribution channel that relies on the cooperation of insurers and intermediaries to access pricing for their different risks (Butterworth & Hutchinson, 2020, 1/13).  The price comparison sites are well established and in addition, they are simple, convenient, and give customers the opportunity to save. As a result, they continue to encourage a lot of customers to purchase insurance policies through them. This makes them ideal for IJ plc as it will not only increase its revenue by using them, but it will incur less cost in using the distribution channel. The second distribution Channel that IJ plc should use is direct distribution. Direct distribution involves selling the insurance directly to customers without going through any intermediaries. As noted by Butterworth & Hutchinson, (2020; 1/12), the advancement in technology and more specifically internet has made direct distribution a viable option. The main advantage of direct distribution is that through leveraging technology such as the internet, an insurance company is able to sell its services directly to customers without the need of establishing physical offices. So, the direct distribution channel is cheap to establish and maintain. Another advantage with direct distribution especially over the internet is that it offers customers convenience as they can purchase an insurance policy at their convenience. Therefore to tap into the growing number of consumers relying on the internet to make their purchases of services, IJ Plc should start distributing its services directly via the internet.  

1. There are several actions that IJ plc will need to take to maximize the benefits from the use of price comparison sites and direct distribution. One of such actions is to set up a well-functioning website.  Both the direct distribution channel and the price comparison channel can only work well if the company has a good functioning website. For instance, the price comparison sites contain a link to the company website from which customers can purchase their insurance policy (Butterworth & Hutchinson, 2020, 1/13).  Also, if customers want to purchase directly from the company, the first point of interaction is usually the company website. Therefore, one of the primary action that IJ plc should take it to establish or create a website not for informational purpose only, but one which can enable customers to purchase a policy directly from the company.  The second action that IJ plc should take to gain maximum benefits from direct distribution is to engage in SEO marketing for its website. The SEO marketing would help improve the visibility of the company website and its service in search engine results and hence being able to attract more traffics to its website and hence more revenue.

Question 2 – Learning Outcome 2 (20 marks)

You are the recently appointed Head of Sales for an insurance company. There are several departments within the company's sales division. During a recent review of the sales division's current annual budget, you have identified the following issues: • The proportion of budget allocated to each department is inconsistent. • All departments have budget variances, both above and below budget. • Variance management is dealt with differently by each department.

 (a) Identify, with justification, four significant ways in which the current budget variances, in the sales division, can be managed effectively. 

 (b) Explain four actions you could take to improve the accuracy of future budgeting, when producing the next annual budget for the sales division.

Budgetary variance refers to the favorable or unfavorable differences between actual performance and budgeted performance (Butterworth & Hutchinson, 2020; 3/13). While small budget variances are nothing to worry about, large budget variances both favorable and unfavorable should be a concern to the manager. As such, variances should be investigated and their cause addressed. To manage the current budget variance effectively, they are four different ways that can be used;

1. Improve the budgeting process- one of the major causes of budget variance is lousy budgeting. In the current scenario, the fact that the budget allocation to each department at the insurance company has been inconsistent shows the existence of a lousy budgeting process which contributes to the existence of the variance. Therefore, one of the ways to manage the variance is to improve the budgeting process.  This should be done by doing proper forecasting based on the projected level of activities as well as following all necessary budgeting processes. if the budgeting process is improved, the variance  will reduce and if they do occurs, they will do so for a good reason
2. Management by exception- this refers to a practice whereby small budget variances with minimal impact are ignored and attention is focused on those variances that are out of the ordinary. large variance usually point to the existence of a problem and as such, it is necessary that when they occur, the management focus their attention on them to identify what the problem is and find a solution to eliminate them
3.  Adopting flexible budgeting- some of the variances occur due to the fact that the budgeted level of activities turns out to be different from the actual level of activities.  So to deal with such variance and to have an accurate measure and comparison of the budgeted versus the actual performance, it is necessary that flexible budgeting is adopted. Flexible budgeting adjusts the budget based on the level of actual activities. For instance, if the number of policies sold by an insurance company is 1000 per month, then the flexible budget adjusts the budgeting to reflect such level of activities. This gives more accurate and useful information than when a static budget is used. 

b) There are different ways in which the insurance company can improve the accuracy of future budgeting. The first action that they should take to so, is to decide the budgeting method to use. Budgeting needed consistency and for them to achieve such consistency, they need to adopt one budgeting method and use it. There are different budgeting methods available to them. These include top-down, bottom, up, zero-based and rolling budgeting (Butterworth & Hutchinson, 2020: 2/12). However, if they can adopt the rolling budgeting, then accuracy can be improved further since rolling budgeting is forward-looking and usually take into account changing condition into account.  The second action they need to take is to decide the type of budgeting to use consistently. There are two types of budgeting i.e. fixed budgeting and flexible budgeting (Butterworth & Hutchinson, 2020: 2/12).  Choosing one and using it consistently can help improve the overall accuracy of the budgeting process. However, flexible budgeting can lead to more effective and accurate budgeting than the fixed budgeting. The third action that they need to take is 

Question 3 – Learning Outcome 3 (20 marks)

You are a risk manager for TBS plc, an insurer. Over the last three years, TBS plc has seen an increasing trend of complaints across several of its operating departments, including the following complaints: • Slow response times when providing new business quotations. • Policy documentation is often inaccurate and issued late. • Claims target settlement dates have been regularly missed. • Commission payments to insurance brokers are often incorrect.

 (a) Identify, with justification, one risk management issue for TBS plc that arises from each of the complaints included above. 

 (b) Discuss how risk management practices could assist the future management of these complaints for TBS plc.

1. Risk management is essential for the success of TBS plc. In most cases, when problems arise in the organization, they are always signs of potential risks. Therefore, the most important thing that TBS plc should do is identify all potential risks associated with the issue arising in the company. In the above, there are several potential risks associated with the issue that has occurred in the company. Below is an explanation of some of these potential risks
2. The slow response time when providing quotations for new businesses can lead to several risks. One such risk is reputation risk.  The slow response time can lead to the development of a negative reputation among customers. This can in turn hurt the  company, as ten negative perceptions would discourage  new customers from choosing TBS plc and hence end up  choosing a competitor
3.  Inaccurate and late policy documentation can lead to several risks. One of such risks is Fraud. The absence of accurate and up-to-date policy documentation can create room for fraud, especially in pricing and claim settlement. 

1. Missing the claim target settlement date can also lead to several risks. One of such risks is reputation risks. When insurance fails to be prompt in settling its claim, it is most likely that customers will be dissatisfied and they will share their dissatisfaction with others either through words of mouth or through an online platform. This would eventually lead to the gradual development of a negative public perception of the insurer which can hurt the business in the long-run. 

1. ) The inaccurate commission payment to brokers can lead to financial risks. Since the commission payment is usually inaccurate, it can lead to a situation where brokers are overpaid or paid for work, they did not do. this can in turn lead to financial loss for the insurance company 

b)

 As explained above, the complaints that TBS plc faces have the potential to lead to a number of potential risks.  These complaints, therefore, need to be carefully management. Several risk management practices can help in doing so. One of the practices is to integrate risk management into the day-to-day running of the organization. In this way, it will become easier to identify and control or eliminate all sources of potential risks. Another important risk management practice that should be adopted is external and internal audits. Conducting internal and external audit would help in identifying some of these complaints become they become major issues and hence dealing with them early in advance before it too late.  Another important risk management practice that can help is establishing internal controls. The existence of most of these complaints shows that TBS plc lacks adequate internal control. For instance, the commission’s payment to brokers being incorrect clearly shows that the TBS plc lacks internal controls that would verify and ensure payment made to protect is accurate. This, therefore, mean that for TBS plc to improve the future management of such complaints, it will need good internal control.  Finally, all of the complaints that TBS plc is facing also show a lack of inadequate governance.  It should note that governance is crucial in risk management and therefore if TBS plc was to successfully deal with such complaints and other potentials risks, it needs to improve its governance. Its governance needs to take risk management more seriously. 

Question 4 – Learning Outcome 4 (20 marks)

You are the Commercial Director for YT Ltd, an insurance broker. Over the last five years, YT Ltd has acquired a number of smaller competitors. Each of the acquired competitors' client base was similar to YT Ltd's. During this period, profits have been lower than anticipated and the expected benefits from these acquisitions have not been realised. Since the acquisitions, the following issues within YT Ltd have been highlighted: • Information technology systems have not been integrated successfully. • Staff retention levels have significantly declined. • There is an inconsistent business culture.