Annie CRM Assignment

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University of Toronto *

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2921

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Computer Science

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Apr 3, 2024

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FOUNDATIONS OF RISK MANAGEMENT - SCS 2921-184 ASSIGNMENT DUE: December 3, 2023 (11:59 PM EST) This Assignment is based on all 11 Modules. Please ensure you fully explain, describe, and use examples to support your answers. Do not assume I know what you mean and ensure you apply the information from the textbook. Do not respond to concepts and descriptions by referencing your industry or professional work experience. Again, reference the text and only reference your industry or professional work experience for examples (if you need to). USE THIS TEMPLATE TO ANSWER THE QUESTIONS BELOW Student Name: XINYI CHEN Question 1 (10 marks) You are a fabulous pizza maker. In fact, every time you make pizza for friends and family, they constantly remind you that your pizza is the best they ever had. They suggest you open a takeout pizza restaurant. After some consideration, you consider creating a business plan. Part of your plan includes consideration for business insurance. a) Identify and describe (4) four commercial insurance policies, a description and example for each policy. Answer: Policy Description Example of Policy 1 Property Insurance Property insurance can cover the potential financial loss of commercial real estate of restaurant such as building of restaurant. Building and Personal Property insurance, Fire and Natural Forces insurance 2 Liability Insurance Liability Insurance covers an organization’s liability except for motor vehicles. Aircraft, General liability insurance, business liability insurance
and specific exclusions. 3 Motor Vehicle Insurance Motor Vehicle insurance covers the property or liability of an organization’s autos and vehicles. Business auto insurance, l and vehicle insurance 4 Occupational Injury and Disease Insurance Occupational Injury and Disease insurance covers the potential loss from incidents at workplace/restaurant. Employer’s liability insurance, Workers compensation insurance, medical insurance b) You are currently considering this planning under the conditions of COVID19. Identify and describe at least (3) three strategic risks, a description and an example for each that is related to your pizza restaurant opportunity. Answer: Strategic Risk Description Example of Strategic Risk 1 Economic environment risk This risk refers to the overall economic environmental risk that the pizza restaurant would encounter during the Covid which will cast pressure on the daily operation of the restaurant. Financial crisis – insufficient capital/fund injection will cause hardship of running business and operations. Short industry demand – less consumer and spending resulting in less revenue, therefore less profit. Inflation – Covid could cause inflation, the increased food price will increase the overall cost production, increased labor cost will increase the overall operation cost, ultimately decrease the profit. 2 Demographics risk This risk refers to the potential decreased number of human population(customer) the restaurant intends to Labor shortage – The Covid has a negative impact on employee productivity and few people are willing to work on site. 2
serve. Increased employee health care and medical expense – Covid created more awareness among employees, they will ask for more coverage of health and medical care. 3 Political Environment risk This risk refers to the impact the government has on an organization. Government regulations – government may introduce new regulations in order to ensure the health factors which will cause more expense on organization. Increased taxation – Government may have deficit because of the Covid, so the government may tax more on business, this will potentially result in less profit of organization. Question 2 (10 marks) a) What does a 5% Value at Risk (VaR) of $1 million mean? Answer: It means that there is a 5 percent of losing $1 million or more of the total value of asset in the given period. b) Explain what is meant when an organization has an Earnings at Risk (EaR) of $500,000 with 95% confidence. Answer: The organization’s earning is projected to be $500, 000 or greater 95 percent of the time and less than $500,000 5 percent of the time. 3
c) Sector Insurance has assets at fair value of $110 million. The present value of its liabilities is $90 million. The market value margin is $6 million. What is the company’s Market Value Surplus (MVS)? Answer: MVS = Fair Value of Asset – Fair Value of Liability = Fair Value of Asset – (Present Value of Liability + MV margin) = $110 – ($90 + $6) =14 million d) i) Using probability models, Sector Insurance determines that its VaR is $10 million. The company may be expected to incur $10 million, or greater, loss of capital at 0.5% probability over a one-year period. What is the company's economic capital? Answer : The economic capital of the company is $10 million since they have 0.5 percent probability of losing at least $10 million in capital. ii) Does Sector Insurance have excess capital or a deficiency in capital? Answer: Capital Surplus = MVS – Economic Capital = $14 - $10 = $4 million Sector Insurance has excess capital (capital surplus) of $4 million. Question 3 (10 marks) a) Identify , briefly describe, and provide an example for the (6) six steps of the traditional risk management process. Answer: Step Description Example of Step 1 Identification It refers to identifying potential risks in the management process and creates a list of Loss of important suppliers; new and changing regulations; reputational and 4
organization’s risk. compliance risks. 2 Analyzing It refers to analyzing organization’s risk identified by first step by 4 dimensions which are loss frequency; loss severity; total dollar loss; timing. Assessing the frequency of breach of contract from a third party. 3 Examining feasibility It refers to applying the risk financing or the risk control technique in order to mitigate the risk. Having a CRO to build up the risk policy and framework, continuously monitoring the effectiveness within the entire organization. 4 Selecting It refers to selecting an appropriate risk management techniques based on organization’s risk appetite and financial position. Selecting the appropriate insurance to transfer the risk. 5 Implementing It refers to implementing the risk management technique being selected. Ensuring the insurance premium is paid, establishing the communication within the whole organization to ensure a successful implementation. 6 Monitoring It refers to monitoring the effectiveness of risk management implementation Conducting quarterly quiz within work streams all over the organization. b) Describe how loss exposures are analyzed in the traditional risk management process and provide an example . Answer: Loss exposure in the traditional risk management process is analyzed based on four dimensions which are: 5
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