Annie CRM Assignment
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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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