Business Economics and Business of Insurance - Assignment Example

Assignment, Business Economics and Business of Insurance Ideally, unemployment should not exist when the demand for labour is equal to the supply of labour at the prevailing level of wages. However, that wages remain constant is not always true. Wages can increase or decrease depending on several factors. The law of supply and demand holds good here. At the equilibrium point, demand of labor is equal to its supply, at a certain wage. However, if the wages were to increase due to some reason say the action of Labor Unions who increase wages collectively. Companies would not find it profitable to invest in labor and thus cut back on the demand, resulting in unemployment. If the wage were to decrease, the companies would typically increase demand for labor (as the wage is below the equilibrium point). However, in this case there would be a shortage in supply of labor, thus creating unemployment. Fig 1. In the above Figure (Fig.1) we can see the equilibrium point of Wage (W0) as the point where the demand and supply curve meet. This is the prevailing wage rate (in a perfect economy). However, if due to some reason (say the actions of Trade Unions) the wage is raised from W0 to W1, the demand for labor shall fall from Q0 to Q1. Thus it shall create an excess supply at Labor Wage W0 and result in employment. (This is with respect to an economy that allows a self adjusting wage rate). Even if we regard the wage as fixed and not self-adjusting, we can still have a situation of unemployment in the market. These can be due to some non quantifiable reasons. Companies in general, do not offer jobs with low hours of labor, owing to the fixed cost incurred on labor. Thus, a worker who wants to cut back on his working hours may have to stop working altogether, thus creating unemployment. (Böheim and Taylor) There may be some workers ‘in-between jobs’ (Böheim and Taylor) as people earn more money; they put greater importance on leisure. (Böheim and Taylor 2000) When the necessities of a person are getting fulfilled with his wages, he will look beyond his necessities and focus on leisure, thus he may leave his work. This also creates unemployment. (Böheim and Taylor) Some workers might have been laid off and are on Unemployment Insurance (UI). This prolongs the unemployment amongst workers. Research has shown that workers on UI tend to prolong their unemployment (Tatsiramos). However, this gross misuse of Unemployment Insurance eventually ends up costing honest policy makers who have to shell out higher premiums. Purpose of Individual and Corporate Tax in UK Income Tax and Corporation Tax are two main sources of revenue for the UK Government. The taxes collected are then used for various avenues of Public Spending such as defense, social security, Municipal Corporation expenditures and making sure that law is being enforced. In the fiscal year 2014, the Government estimates to have a total Public Spending of about £719 billion. The allocation of these expenses are to be as follows: Public Pensions 20 % (approx) National Health Care 18% State Education   12% Defense 6.5% Social Security 15.7% State Protection 4.4% Transport 2.6% General Government 1.9% Other Public Services 11.5% Public Sector Interest 6.9% Others .5%. (UK Public Spending) Moreover, in the FIFTH REPORT of the Committee on Social Security, it states “National Insurance contributions are increasingly described by the Government as a form of taxation. The transfer of the Contributions Agency (which collects contributions) from the Department of Social Security to the Inland Revenue, and recent steps by the Chancellor to align the conditions for payment of National Insurance contributions to income tax (see below) suggests an attempt to equate the two. However, there are important differences. The base of the charge is far narrower for National Insurance, which is based on earnings. Income tax is charged on all income, including income from savings, investments, and pensions. The period of assessment is also markedly different. Income tax is based on an assessment of income over a year, whereas National Insurance contributions are assessed fully and finally on earnings for each pay period, usually a week or a month. The structure of the charge differs, in that individuals tax thresholds vary depending on the various allowances and reliefs they qualify for, whereas the threshold for paying National Insurance Contributions is standard for all earners. And whereas income tax is charged without an upper ceiling, employees National Insurance contributions are only charged up to the Upper Earnings Limit.” (Select Committee on Social Security) Business Cycles: Causes and Implications: The Federal Reserve Bank of San Francisco defines business cycles as “Business cycles are the "ups and downs" in economic activity, defined in terms of periods of expansion or recession. During expansions, the economy, measured by indicators like jobs, production, and sales, is growing–in real terms, after excluding the effects of inflation. Recessions are periods when the economy is shrinking or contracting.” (Dr Econ) There are typically four phases of a Business Life Cycle, which is recurring in nature. They may be outlined as Prosperity: When the economy is in boom or an up-swing. Recession: When the economy is turning back from the Prosperity period. Depression: When the economy is in the down-swing Recovery: When the economy is is emerging from Depression and going towards Prosperity. The four phases can be described with the help of a diagram (Fig.2) as shown below: In the above mentioned Figure (Fig. 2) we can see how the phases come and go in the Life Cycle of a Business. The business reaches prosperity phase when it is at or above the desired growth rate, where the demand is at the highest, there is expansion in the industry, trade and supply are at their highest. Then, after reaching a saturation point or peak, the business falls into a depression where although it remains positive, it is below the desired growth rate. In this scenario, it is generally seen that demand begins to fall, there is excess supply, and businesses see a down turn. Slowly, the business falls into depression, which is in the negative zone. There is overall business pessimism in the economy, demand fall to the lowest. This phase hits a bottom, and slowly we see it move up again. This is known as Recovery, where we again see demand increasing, trades and employment rise again, and supply is again normalized. As mentioned earlier, this is a recurring chain of events, and therefore, from Recovery the business once again enters the Prosperity phase and so forth. (University of Colorado). Business cycles are related to the unpredictability of economic growth, and the various stages of the economy, from boom to wear out. (Pettinger). There are various causes and factors that determine a business cycle. They can be outlined as follows: Inflation: Generally, inflation is regarded good for the economy; it results in higher output and productions as well as demand. However, when inflation gets out of control it creates havoc in the economy. Prices rise beyond expectations and general demand of goods and services begin to decline. (Burns 1-53) Interest rates: Any change in the interest rate can affect the growth of an economy. For example, if the interest rate is reduced, this lowers cost of borrowing to the consumers thus, it leads to an increase in the disposable income of consumers. This leads to higher demand for goods and services and economic growth. However, if the Central Bank increases interest rates in order to check inflation, consumer spending and investments will also fall, leading to slow economic growth and eventual recession in the market. (Burns 1-53) Capital Markets: A sell off in the capital markets due to profit booking by investors or Mutual Funds can lead to falling prices of Stocks & Shares. This can create paranoia in the economy and set off a down-turn. For Example, the crash in 1929 brought on the recession. (Teh and Hawksworth 3) International Economy: In the Global world, any economy is impacted by the World Economy. Research has shown that the world economy. With spiraling fuel prices among others, an Economy such as UK can be severely impacted, since it is not an indigenous producer of fuel and has to import fuel. (Hossain) Other Factors: Other factors such as war, natural calamities etc also hurt the demand amongst consumers. (Cable) this may lead to economic downturn due to uncertainty in the markets. The business cycle impacts the general economy as a whole and organizations and business specifically. Some of the impacts of the business cycle are: As the economy varies, so does the demand. An increase in demand generally increases overall profitability and a fall in demand will have the reverse effect. (CIMA) Unemployment too is a result of economic downturn. In order to remain profitable, companies explore various cost cutting measure. Downsizing is one of them. Similarly, in times of economic growth, companies look to hire more people and this also increases the base wage rate across the board. (CIMA 2011). Moreover, companies need to adjust their supply according to changes in demand. This may lead to expansions in times of boom or prune business activities in time of a recession. (CIMA) The Insurance business is a segment of the Economy, and it too is affected by the good and periods of the Economy. For example, during times of recession, unemployment rises. With it, rises the payouts of Unemployment Insurance to its holders. Moreover, during recession, the general applications for Insurance also falls, this leads to lesser sales and thus lesser revenues for the Insurance Companies. On the other hand, in times of Economic confidence and well-being, the insurance industry too benefits with higher sales and profit margins. Insurance companies have substantial investments in order to make their money grow. During bad times, there is slow or negative growth in asset accumulation and in times of boom the growth rate is generally quite high. A point can be made of Insurance Major AIG which was brought down in times of economic crisis. (IIS) Measures to avoid serious Ethical Issues: Ethics in business may be defined as the integration of ethical values into the way business is operated. The ethics in business effect the organization both internally as well as externally. Ethics should not be confused with legal bindings on an organization. It is more about the overall values used to run a business. (IBE) “According to IBE/MORI research published in October 2013, the three major areas of public concern are corporate tax avoidance (37%), executive pay (30%) and employees being able to speak out about company wrongdoing (22%). Bribery and corruption (20 %) and discrimination (20%) also cause the public concern.” (CII) Companies need to integrate ethical practices into their daily business, and their business model as a whole, especially in the process of decision making. The top level management must set the bar of ethical practice themselves, which can be a benchmark for reward or punishment for lower level managers. The Board of Directors should keep strict vigilance on the Executives. Proper measures must be taken to ensure Environment and safety regulations are being adhered to. The Finance Department of companies need to be vigilant and honest about the finances of the company. They should not endeavor to dupe the public with misguided financial results, and pay taxes and duties as required and on time.(Smart, and Cohen). The management should not indulge in bribery or corruption, interactions on Social Media such as Facebook or Twitter should be screened so that no scandalous issues are being inflicted.  (CII) Insurance fraud costs the insurance industry, and ultimately shareholders and policyholders, at least £2bn a year. The problem has grown in importance as customers see insurance companies as fair game for fraud, and recession means more people have financial problems (CII n.d). This should be brought in check by the Insurance companies by strictly monitoring the claims of the people. However, they should keep in mind while handling claims and not have a bias that all claims are fraudulent in nature. Careful screening measures should be enforced when applicants apply for the insurance, especially those who have a history of false claims. References: Böheim, Rene and Mark Taylor, Option or obligation? The determinants of labour supply preferences in Britain Institute for Social and Economic Research University of Essex., 2000, Print. Burns, Arthur, The Business Cycle in a Changing World, NBER,1969, Print. Cable, Vincent, The economic consequences of war, The Guardian UK. 2003, March 3 2014, available at http://www.theguardian.com/politics/2003/feb/02/foreignpolicy.iraq CIMA, Decision making across the business cycle Chartered Institute of Management Accountants (CIMA), 2011, March 3, 2014 from: http://businesscasestudies.co.uk/cima/decision-making-across-the-business-cycle/introduction.html#axzz2uuch81Ss CII, Code of Ethics Chartered Insurance Institute, 2013, March 3 2014 from: http://www.cii.co.uk/code Dr Econ, What are business cycles and how do they affect the economy? Federal Bank of San Francisco, 2002, March 3, 2014 from http://www.frbsf.org/education/publications/doctor-econ/2002/may/business-cycles-economy Hossain, Naomi, The Impacts of the Global Economic Downturn on Communities and Poverty in the UK, Institute of Development Studies, 2011, Print. IIS, The Impact of the Economic Crisis on the Insurance Industry, International Insurance Society (IIS), 2011, March 3 2014,from: http://www.iisonline.org/forum/systemic-risk/new-forum-topic-created-at02-03-2011-11-56/ IBE, What is business ethics? Institute of Business Ethics (IBE) March 3 2014 from: https://www.ibe.org.uk Pettinger, Tejvan, Causes of Business Cycle Economics Help [online], 2013, March 3 2014, from: http://www.economicshelp.org/blog/386/economics/causes-of-business-cycle/ Tatsiramos, Konstantinos, The Effect of Unemployment Insurance on Unemployment Duration and the Subsequent Employment Stability European University Institute, CentER, Tilburg University and IZA Bonn Discussion Paper No. 1163 May 2004, March 3, 2013 from: http://ideas.repec.org/p/iza/izadps/dp1163.html The, Yeh Lin and John Hawksworth, Are stock markets reliable leading indicators of the real economy for the US and the UK? PWC, 2013 University of Colorado, The Business Cycle, Aggregate Demand and Aggregate Supply March 3, 2014 from: http://www.colorado.edu/economics/courses/econ2020/section7/section7-main.html Smart, Victor and Danielle Cohen, Incorporating ethics into strategy: developing sustainable business models, Chartered Institute of Management Accounts (CIMA) discussion paper, 2010, March 3, 2014 from: http://www.cimaglobal.com/Documents/Thought_leadership_docs/Sustainability%20and%20Climate%20Change/ethics_reportFINAL.pdf Select Committee on Social Security (1995) Fifth Report THE CONTRIBUTORY PRINCIPLE The relationship between tax and National Insurance, March 3, 2014 from: http://www.publications.parliament.uk/pa/cm199900/cmselect/cmsocsec/56/5605.htm Read More