Discuss the below:
PART A-
1) Explain the likeyly similarities and differences between EACG stage of the risk management cycle for
a) A small business ( such as a one man window cleaning operation)
And
b) A large international corpororation ( such as a multinational oil company)
2) Most people would agree that "fewer losses is better than more losses". Nevertheless, it is useful to have access to large data sets of past losses for improved estimates of key variables as an aid towards improved risk management decisions
Explain how access to large data sets relevant to past losses can be useful towards
a) Loss control decisions and
b) Loss financing decisions.
3) Insurance is generally accepted as a useful risk management tool for dealing with ‘high severity, low likelihood' losses. However, it can be expensive.
Explain how risk management techniques OTHER THAN INSURANCE can be useful towards managing risks in a cost effective manner during periods when insurance is expensive.
4) a) Provide TWO examples of PURE risks for which commercial insurance cover is usually available and explain WHY is it usually available.
b)Provide TWO examples of PURE risks for which commercial insurance is NOT usually available and explain WHY is it not usually available.
c) Provide TWO examples of PURE risks for which commercial insurance cover is ‘available sometimes but not at other times' and explain how the availability (or not) of commercial insurance is influenced by "the underwriting cycle".
PART B-
1) Compare and contrastthe key variables and estimation processes involved in applying the net present value (NPV) appraisal technique to a) a typical business project , b) a loss control project and c) risk financing arrangements for PURE risks. d) risk control projects
2)a) For a disaster of your choice (major or minor) relate actual events and arrangements to EACH stage of the risk management cycle and offer your thoughts on
i) what was right and what was wrong and
ii) how risk management arrangements could be improved to reduce the frequency and/or severity of losses from similar, future disasters.
b) Explain AND evaluate the arrangements for dealing with EACH stage of the risk management cycle for an organisation (or part of an organisation) of your choice.
3) For an organisation (or part of an organisation) of your choice,
a) distinguish between the main i) business and ii) pure loss exposures.
b) For the pure loss exposures ONLY, classify the key risks into ‘small', ‘significant' and ‘catastrophic' according to suitable criteria.
c) With reference to your answer to part b) of this question, explain suitable risk control and/or financing arrangements for each of the loss exposures
4) Vegfreezy is a firm which stores frozen vegetables (collected from local farms) in a large refrigerated warehouse until they are required in the frozen food counters of supermarkets. The firm has been suffering routine losses of frozen vegetables due to handling accidents amounting to £180,000 per year. Management at Vegfreezy are also aware that, if the refrigeration unit at the warehouse failed, all the stock of frozen vegetables would be ruined at an estimated cost of £1.8 million (the maximum probable loss (MPL)). The current annual insurance premium for covering the risks to the frozen vegetables is £375,000. This amount is considered to be too expensive so management at Vegfreezy are considering an alternative method for financing the risk via a self-insurance fund. The size of the fund would be equal to the MPL, would cost £50,000 to administer and would earn a risk-free return of 8%. From its operations, Vegfreezy usually earns a 17.1% rate of return.
REQUIRED: (making any necessary assumptions)
a) Use ‘Houston's Equations' to calculate i) the opportunity cost of insurance and ii) the opportunity cost of self-insurance (15 marks) for Vegfreezy.
AND
b) Explain the limitations of using Houston's Equations as a basis for deciding whether to insure or self-insure the loss exposure and explain other information which may be relevant to the situation and how it might influence the decision.
5) ‘Insurance is the best risk management device for some loss exposures, satisfactory for others, but for some it is either inappropriate or unavailable'. Discuss this statement in relation to
a) NON-insurance techniques for dealing with risks faced by organisations
and
b) characteristics of risks which influence the willingness of the insurance industry to offer insurance products.
6) Sealand Ltd. is valued at £18 millions and currently earns a 15% return on capital. Losses from pure risks at Cruncher are usually around £180,000. For the forthcoming year Sealand's insurers have quoted an insurance premium of £700,000 to cover all losses.
REQUIRED: (making any necessary assumptions)
a) Calculate Sealand's opportunity cost of insurance
b) Calculate the opportunity cost if management at Sealand set up a £2,400,000 fund to cover potential losses. The fund would be invested at a risk free 5% rate of interest and cost £300,000 to administer.
c) On the basis of the information and your calculations so far for this question, offer your opinions on whether the managers at Sealand should choose the full insurance (as in a)) or the fund (as in b)
d) Explain what information OTHER than that provided is relevant to the situation and how it might influence the decision to insure or self-insure
e) Suggest and explain details of alternative ways that Sealand's pure loss exposure could be handled that might be more sensible than either full insurance or full self-insurance
7)a) With reference to characteristics of risks which influence the willingness of the insurance industry to offer insurance products, explain WHY insurance is unavailable for some kinds of risks.
AND
d) Explain alternative risk management strategies for dealing with risks which are uninsurable.
8) For an organisation (or part of an organisation) of your choice
a) explain the PURE risks under the headings of
i) Asset risks
ii) Personnel risks
iii) Liability risks
iv) Consequential loss risks.
AND
b) Rank the risks described in part a) of this question in terms of severity (low, medium and high) and likelihood (low, medium and high).
AND
c) With reference to your answers to parts a) and b) of this question, explain the appropriate risk management techniques for dealing with the risks.
9) Frank, Sid and Sue are managers of Posh Shops Ltd. and they need to decide how to finance their property losses (estimated on average at around $5 millions per year) for the year 2011.
Total value of property owned by Posh Shops is $300 millions.
Frank suggests that the best loss financing method would be to insure the whole property loss exposure at an insurance premium of $6 millions.
Sid, however, is unwilling to pay the $1 million over the expected value of losses to an insurance company and suggests setting up a self-insurance fund instead. The size of the fund would be 15% of the value of property assets at risk and it would earn a risk-free 7% return.
A third alternative, suggested by Sue, would be to purchase an insurance with a deductible/excess of $1 million which would cost $3.5 millions. Losses below the deductible/excess are estimated at $2 millions but, to allow for variations around this expected value, Sue suggests that the size of the fund set aside to cover the self-insured part of the loss exposure should be $10 millions. Similar to Sid's suggestion, the fund would earn a 7% risk-free return.
At the end of 2010, Posh Shops will be worth $1,000 millions and anticipates a 15% rate of return in 2011.
REQUIRED (making any necessary assumptions and showing all workings):
a) Calculate the expected net worth of Posh Shops at the end of 2011
i) if Frank's suggestion is implemented
ii) if Sid's suggestion is implemented and Posh Shops is lucky enough to suffer zero losses
iii) if Sid's suggestion is implemented and actual losses are as anticipated
iv) if Sue's suggestion is implemented and losses are as anticipated .
b) Offer, on the basis of your calculations so far for this question, your views on whether Frank, Sid or Sue has the best suggestion for financing the property loss exposures
c) List and explain any other factors which are not mentioned in this question but which might be relevant to the decision and how they might influence it
10) a) Provide details of THREE examples of PURE risks for which the insurance industry will not provide insurance cover.
AND
b) Explain WHY the insurance industry is not willing to offer cover for EACH of the three risks
AND
c) Suggest alternative ways for corporations to manage EACH of the risks that you have described in part a) of this question
11) a) i) For an organisation (or part of an organisation) of your choice, provide and explain examples of PURE losses which should be categorised as
i) minor
ii) significant and
iii) catastrophic.
ii) Suggest appropriate risk management tools and techniques which could be usefully applied to each type of loss described in part a) of this question
AND
b) Explain, with reference to EACH stage of the risk management cycle as applied to ONE of the following;
A chain of hotels
A commercial bank
A manufacturer of toys
A firm of auditors
A hospital
A supermarket
i) the key risk management decisions
AND
ii) the costs and benefits that need to be estimated when making those decisions
12) Explain and evaluate the contribution of probabilistic and/or statistical estimation procedures towards making THREE different risk management decisions
13) Management at Execotel needs to decide how to finance next year's property loss exposures. They have been quoted an all-risks insurance premium of £3.36 millions to cover the potential losses which are usually around £2.7 millions per annum. Execotel is currently valued at £27 millions and is expected to earn a 15% return on capital in the forthcoming year.
REQUIRED (making any necessary assumptions)
a) Calculate the opportunity cost of insurance.
b) Calculate the opportunity cost of self-insurance by maintaining a £3.6 million contingency fund which would cost £450,000 per annum to administrate and which could be invested to earn a risk-free 5% return on capital
c) From your calculations in parts a) and b) of this question, identify whether commercial insurance or self-insurance is the cheapest option after taking opportunity costs into account.
d) Provide details of further information which could be relevant to the decision and how it might cause management at Execotel to choose a different option to the one you have identified in part c) of this question.
14) a) Explain WHY insurance cover for the following types of loss exposure IS or IS NOT likely to be available from commercial insurers;
i) a strike (withdrawal of labour)
ii) a speeding fine
iii) losses due to computer fraud in a commercial bank
iv) losses caused by terrorist attack
v) death of a pet dog through natural causes.
AND
b) Offer suggestions for risk management solutions OTHER than commercial insurance for the loss exposures you have identified in part a) of this question as uninsurable.