N 9 . According to the text, risk management represents the merging of three specialties. Identify these specialties and explain the contribution of each to modern risk management theory. The three specialties are decision theory, risk financing, and risk control. Decision risk is operations research and science management. Risk financing is a type of specialty that is from the disciplines of finance and insurance. Risk control is a specialty that comes from a merge between the traditional safety management and the safety that comes from the military and aerospace industry. Identify the two broad approaches to dealing with risk recognized by modern risk management theory. Risk control is what focuses on trying to prevent the risk of loss which also includes avoidance and reduction. Risk financing is basically there to make sure if there is an accident there will be money to pay for it. Identify and briefly describe the four basic techniques available to the risk manager for dealing with the pure risks facing the firm. Give an example of each technique. Reduce it, avoid it, accept it, and transfer it. . The text states the emergence of risk management was a revolution that signaled a dramatic shift in philosophy. What was this change in philosophy? The change was when people started changing their attitude towards insurance. Soon insurance would not have a standard approach of really only ever dealing with risk. . Identify and briefly describe the six steps in the risk management process. Identify the risk, this basically means to brainstorm a better way to look at the risk. Analyze the risk, this is the step where you will gather all your information. Prioritize the risk, if you have a long list of risks you will need to make a list of which one is more important to solve. Assign an owner to the tisk, there needs to be a person who is responsible for each risk and they will need to resolve their risk. Respond to the risk, this is the step when you need to decide how to resolve the risk. Monitor risk, this is where meeting will eventually be set up to help monitor or manage risks. . Briefly describe the development of risk management as a function of business in the United States. In your opinion, what were the primary motivating forces and the strategic factors that led to the development of risk management? Personal risk identifies loss exposure, analyzes the10. loss exposure, selects appropriate techniques for treating the loss exposures, and implements and reviews the program. . Describe the responsibility of the risk manager and the risk manager’s position within the organization. A risk managers job is to identify the financial impact of a loss to an employee, their organization, the public, and even to the environment. . What is the relationship between risk management and insurance management? In your answer, you should demonstrate an understanding of the difference between the two fields. The difference is one helps protect you from risk where the other helps you when a risk occurs. . Identify two common misconceptions about risk management and explain why these misconceptions developed. Risk management is only applicable to larger organizations, and that risk management is to minimize the role of insurance. Distinguish among traditional risk management, financial risk management, and enterprise risk managementChapter 3 questions 1 a) b) ¢ List and explain each of the desirable elements of an insurable risk. - Large numbers of exposure units - Definite and measurable loss + The loss must be accidental = The loss must not be catastrophic Explain the dual application of the law of large numbers as it pertains to the operation of insurance. + Toestimate the underlying probability accurately, insurer must have a large enough sample - Once the estimate of probability has been made, it must be applied to a large number of exposure units to permit the underlying probability “to work itself out” What is the effect of an increase in the number of observations in a sampling technique on: The underlying probability of the event - an increase in the number of observations has no effect on the underlying probability of the event. Our estimate of the probability - An increase in the number of observations should increase the accuracy of our estimate of the probability The standard deviation - The larger the sample, the more closely we will expect the mean of the sample to coincide with the mean of the population and the smaller will be the margin we must allow for error. Identify the two fundamental functions involved in the operation of the insurance mechanism. The two fundamental functions involved in the operation of the insurance mechanism are: - The transfer of risk from the individual to the insurer or the group ~The sharing of losses on some equitable basis (pooling) These functions reduce or eliminate uncertainty for the individual, and provide a basis for spreading the impact of losses5. How does insurance create certainty from the stand- point of the insured? In the case of the individual, insurance substitutes certainty for uncertainty by the substitution of the small certain cost (premium) for the large uncertain loss that would exist in the absence of the insurance. The uncertainty regarding whether or not a loss will occur is not diminished, but uncertainty regarding financial loss is eliminated for the individual. 6. Give examples of three uninsurable exposures and indicate why each is uninsurable. There are many possible examples of uninsurable risks, including; - war (catastrophe) - damage caused by termites (not definite in time) - damage to reputation (not measurable). Other factors which should be considered are the potential for adverse selection and the economic feasibility of the insurance. These factors do not prevent insurers from covering the risk. Adverse selection creates difficulties for insurers (for example, health insurance; flood damage in property insurance). Some risks (for example those with a high frequency of occurrence) will not be economically feasible from the insured’s perspective and common sense dictates that these types of policies should not be considered by insurance buyers. 7. What are the costs to society of insurance and what are the contributions that insurance makes to society that justify these costs? Economic contributions; = Creates certainty about the burden of loss - Spreading losses that do occur - Provides for an optimal utilization of capital 8, What are the specific conditions of a social insurance plan that distinguish it from private or voluntary insurance? The condition that distinguishes a social insurance plan from a private insurance plan is the fact that it is compulsory. 9. Briefly describe the three general categories into which private or voluntary insurance may be vided Classification of private insurance; ~ life insurance - Accident and health insurance - Property and liability insurance10. Briefly explain the fundamental difference between an insurance contract and a surety bond. The fundamental difference between suretyship and insurance is in the relationship among the parties and the surety's attitude toward losses. See page 47. In insurance, the insurer assumes the obligation to indemnify the insured in the event of a loss. In the field of suretyship, the surety is analogous to the co-signer of a note, binding itself with the principal for some obligation. If the principal is unable to perform, the surety is obligated, but retains the right to subrogate against the principal. Losses are expected in insurance, and the underwriter may consider marginal risks at an increased rate. In the case of surety bonds, losses are not expected. Indeed, the underwriting process is designed to weed out those applicants that are likely to fail in performing the activity for which they seek a bond. The distinction is sometimes made between suretyship as a three-party contract and insurance as a two-party contract, but this is a minor distinction in comparison with the difference based on the attitude toward losses.‘TUTORIAL 1 QI. Define risk. In your definition, state the Risk is defined as “an a or set of events that, should it occur, will have an In other words, it is the probability of winning or losing something worthy. While uncertainty implies a situation where the future events are not known. Moreover, risk can be measured while uncertainty cannot be measured. Beside that, risk can be control while uncertainty is uncontrollable. Furthermore, risk can be minimized while uncertainty cannot be minimized. 2. Risk may be sub-classified in several ways. List the three principle ways in which risk may be categorized, and explain the distinguishing characteristics of each class. Answer: © Dynamic risks and Static risks Dynamic risks are those resulting from changes in the economy. It changes in price level, income and output and technology may cause financial loss to members of economy. It may affect large number of individuals as it generally considered as less predictable. Static risks are those losses that would occur even if there were no changes in the economy. This risks that involve losses brought by irregular action of nature or by dishonest misdeeds and mistakes of man. Static risks are generally predictable, so it is more suited to treatment by insurance. Fundamental risks and Particular risks Fundamental risks involve losses that are impersonal in origin and consequences. It is caused by either natural phenomenon such as earthquake or social phenomenon like inflation or unemployment. They will affect everybody in society and it may or may not be insurable. Particular risks are risk that affects only an individual and not everybody in the community which individual can control such as robbery, fire etc. It is insurable by purchasing of insurance. * Speculative risks and Pure risks Speculative risks hold out prospects of loss, gain, or no loss no gain. They are very common in business undertakings or investing in stock market. They are not insurable. Society may benefit from a speculative risk is a loss occurs. Speculative risks are more voluntarily accepted because of its two-dimensional nature of gain or loss. Pure risk is a risk where there is only the possibilityof a loss or no loss. Pure risks are insurable and society will not benefit from a pure risk if a loss occurs. They are not voluntarily accepted. 3. The distinction between “pure risk” and “speculative risk” is important because only pure risks are normally insurable. Why isthe distinction between “fundamental sk” and “particular risk” Answer: The distinction between “fundamental risk” and “particular risk” important, since government assistance may be necessary in order to insure fundamental risk. Social insurance, government insurance programs, and government guarantees and subsidies are used to meet certain fundamental risk in our country. For example, the risk of unemployment is generally not insurable by private insurance companies but can be insured publicly by federal or state agencies. In addition, flood insurance is only available through and/or subsidized by the federal sovernment. ee aS of pure risk facing an individual or an organization and give an example of each, Personal risk. These consist of the possibility of loss of income or assets as a result of the loss of the ability to earn income. For example, unemployment. The risk of unemployment due to socio-economic factors resulting in financial insecurity. Property risk. Anyone who owns property faces property risk simply because such possessions can be destroyed or stolen. Property risk embrace two distinct types of loss: direct loss and indirect or “consequential” loss. For example, the immovable item such as land and building being damaged due to flood. The movables item such as personal assets being destroyed due to fire. Liability risk. The basic peril in the liability risk is the unintentional injury of other persons or damage to their property through negligence or carelessness. For example, if you injure your neighbour or damage his property, the law would impose fines on you and you may have to pay heavy damages. Risk arising from failure of others. When another person agrees to perform a service but failed to meet the agreed obligation which leads to losses suffered by the other. For example, a failure of debtors to make payments as expected. 5, Briefly distinguish among the three categories into which hazards may be give an example of each. There are Physical hazards, Moral hazards and Morale hazards. Physical hazards consist of those physical properties that increase the chance of loss from the various perils, For example, Unguarded machinery and moving machinery parts that a worker can accidentally touch Moral hazard refers to the increase in the probability of loss that results from dishonest tendencies in the character of the insured person. For example, you have not insured your housefrom any future damages. It implies that a loss will be completely borne by you at the time of a mishappening like fire or burglary. Hence you will show extra care and attentiveness. You will install high tech burglar alarms and hire watchmen to avoid any unforeseen event. But if your house is insured for its full value, then if anything happens you do not really lose anything. Therefore, you have less incentive to protect against any mishappening. In this case, the insurance firm bears the losses and the problem of moral hazard arises Morale hazard not to be confused with moral hazard, acts to increase where insurance exists, not necessarily because of dishonesty but because of a different attitude toward losses that will be paid by insurance, For example, a person might be careless in locking the doors and windows when leavinghome. Q6. Discuss the key risks that a financial institutions faces. a, Credit Risk Credit risk is the risk that someone you deal with will default on his or her obligations to you. Companies will need to manage the credit risk of both their customers and their suppliers. The majority of a financial institution’s credit risk arises from its lending activities — outstanding loans and leases, trading account assets, derivative assets, and unfunded lending commitments that include loan commitments, letters of credit, and financial guarantees. For lending to corporations, the main credit-rating agencies for large corporations in the United States such as Standard & Poor's. Based on the grade, the bank decides whether to offer credit to the customer, in what amount, at what interest rate, and with what terms. b. Liquidity Risk Liquidity risk arises out of the inability to execute transactions so it’s the potential risk for an organization of not meeting its short-term debt commitments and therefore incurring large losses. Payables are paid faster than collection from receivables, Liquidity is generally defined as the ability of a financial firm to meet its debt obligations without incurring unacceptably large losses. An example is a firm preferring to repay its outstanding one- month commercial paper obligations by issuing new commercial paper instead of by selling assets. Thus, “funding liquidity risk” is the risk that a firm will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected,without materially affecting its daily operations or overall financial condition. Example: Company faces shortage of cash to purchase materials for production. c. Legal Risk Litigation risk- Litigation is the most discussed legal risk in organizations. Litigation is often public and always distracting. The range of events that cause litigation is broad: employee misconduct, accidents, product liability and so on. Such as non -compliance to Companies Acts. Q/. Discuss three (3) benefits of risk management to an organization. a. Fewer sudden shocks and unwelcome surprise It creates awareness among the scheduled terms of risks that are a successful analysis and evaluation of exercising the modules of risks. It ensures the organization with all possible outcomes of the independent and objective assessments that are analyzed on taking challenges. It enables one to concentrate on the risk treatments within the lessons learnt and are scheduled into lack of preparation. It has subsequent phases regarding each module within the identified data. b. More efficient use of resources The risk management plans and policies under help in efficient use of resources and protecting the resources of the organization. This helps in promoting the resources instead of using them illegally. It also equips safety among the adaptive changes to the staff alternatives and is bundled together with the other resources. c. Better service delivery Effective risk management can help to avoid failure in service delivery and help to save more cost and time. Well managed risk taking also presents opportunities to deliver better services. It also help to make more reliable decisions, and improve efficiency.TUTORIAL 2 1. Why is risk management important in the publie sector? Government departments are responsible for services such as the provision of health care and education, protecting the environment (heavy flooding or an extreme traffic situation), regulating industry (healthcare or food safety) and the payment of social services. All involve some degree of risk. Governments have always been concerned with the protection of their citizens from risk. However, it may be argued that they now have to deal with risks from a more diverse range of sources, emanating from the broad spectrum of public services currently provided. But this is no real surprise, as there has been a similar broadening of business risk exposure. Government is also an entity like multinational companies, faced with multitude levels of risks. On top of these, it is also the responsibility of the government to deal with terrorism (counterterrorism activities, fo [SERENE environment and other safety related enforcemenss as well as reputational risk management. There is increasing expectations from the government’s stakeholders as society moves towards civilization. py due to development in the global connectedness and international trade between countries, 2) Outline the five (5) basis for Firstly, the poor risk management is the investors look and without IAGEHIQ INE to the organization busines as a whole. Besides that, they just ised the sks witout printing tem or considering the extent to which risks are correlated with each other, Third, the investor is of not meeting the business objectives. Also, they just or its penalty clauses to mitigate the risk. Lastly, people are or no contingent plan. 3. Discuss the role of corporate governance as the proponent of good enterprise risk management system. The role of corporate governance acts as catalyst to pressure good enterprise risk management system and explain to the shareholders. ‘The pressures adoption of sound risk management and disclose of all management approaches. Corporate governance provides top down monitoring on enterprise risk management. In Summary, a good Enterprise risk management is encourage by a good Corporate governance. 4, Discuss the six (6) features of effective risk management. i, Risk management policies and benefits should be clearly communicated to all staff. There needs to be a clear definition of the risks, and these must be understood across the organization. Responsibility for responding to and managing the risk must be clearly understood and individuals held accountable for fulfilling the roles. Managing risk must be seen as part of every process and position.ii, iii, iv. Senior management need to support and promote risk management. ‘The need for risk management must start and be supported at the highest level within the company. This includes the government level and the CEO. The support must be genuine. ‘The department's culture should support nature of risk taking. The organization’s culture must provide for the active management of risk. Once a company has decided that it will support each of these elements, a champion within the organization can be selected to start the process to identify, measure, assess, etc, and thereafter ensure the continuance of the process. Risk management should be embedded in management processes. Example. Risk identification should be an explicit step in a company’s strategic planning cycle. This would require consideration of those risks that might arise in the long-term planning horizon, identification of the emerging risks during strategic planning will be more important than acknowledging the current risk inherent to the business. The anticipated impact of emerging risks may render the business or products obsolete and, therefore, signal very aggressive. ‘The management of risk should be closely linked to the achievement of objective. Level/ Risk Objective Risk(s) Board of directors Enhance shareholder values | Inappropriate strategy Excess infrastructure CEO Maximize net income Understanding competition Store Manager Provide pleasant shopping | Insufficiently trained staff experience for consumer Store not appealing appearance Merchandising Manager Maximize revenues season Goods don’t reflect latest trend Store Clerk Minimize cash under Illegal tender passed consumer The ultimate goal of risk management is the same as the ultimate goal of the other functions in a business- to maximize the value if the organization, Modem financial theory suggests that this value that is to be maximized is reflected in the market value of the organization’s ‘common stock. According to this view, risk management decision should be appraised against the standard of whether or not they contribute to value maximization. The main objective of risk management is to preserve the operating effectiveness of the organization. Risks associated with other organizations should be also assessed and managed. Risk management is seen as everyone’s responsibility, experience and practice is shared across the business and a common set of tools and techniques are used. Not attuned to consumer buying Goods don’t arrive in time for 5. State the eight (8) areas of ERM and explain each area. Enterprise Risk Management is a common framework applied by business management and other personnel to identify potential events that may affect the enterprise, manage the associated risks and opportunities and provide reasonable assurance that our Company's objectives will be achieved. i. Internal environmentiii, iv. Management encourage a risk culture that has individual accountability at its heart. This means that each employee is encouraged to be open, candid and fact-based in discussing risk issues, making all relevant facts and information available so the company can consider all possible options and make decisions. We are all accountable for speaking up and escalating concerns to management about issues that may cause risk or potential harm. Objective setting ‘The Executive Committee sets overarching strategic objectives as well as financial targets based upon the Enterprise growth priorities, these objectives are cascaded to our business across the globe ensuring alignment across the Enterprise. Senior management is accountable for meeting the set objectives. Business unit, functional and individual employee goals are aligned to overall objectives of the organization and are consistent with the Company’s overall mission. Event identification ‘As part of the strategic planning process and day-to-day management of the business, functional leaders identify internal and external events that may affect the achievement of our Company’s objectives. Internal and external events affecting our ability to achieve these set objectives are identified at various points in the business cycle. During strategic and business planning and review processes, business unit management assesses the market and competitive environment to identify risks and opportunities facing their business. The various risk management functions within or assigned to that business unit provide expertise, support and input into the process. Each of the risk management functions is represented on applicable management committees to enable effective risk identification and business partnership. Risk assessment Risk management function personnel help identify and assess these risks through their expertise, formal assessment and analysis of business intelligence and trends. Throughout the year, risk assessment, scans and surveys are performed by the business and risk management functions to identify intemal and extemal events that might affect achievement of the Company's objectives. Additionally, the various risk management functions scan the external environment for the risk indicators through analysis of applicable business intelligence, including trends in external health authority and other government inspections and enforcement, legislation changes, and shifts in market, payer and consumer models, as well as relationships with external subject matter experts. Finally, risk management functions review the output from internal monitoring and assurance activities to identify gaps and emerging risk areas. Risk are analyzed, considering likelihood and impact of given outcome, to determine how they should be managed. Risk response ‘A response is determine based upon the overall risk exposure, considered as a function of likelihood and impact of the occurrence. Risk response may include avoiding or evading, accepting, reducing and sharing or transferring risk. For each of the risk identified, a response is determined by the business leaders in consultation with the applicable risk management functions. The activity or situation posing the risk may be avoided or evaded, accepted, reduced, shared or transferred, depending on the facts and circumstances. The specific response is determined based upon the overall risk exposure, considered as a function of likelihood and impact of the occurrence, coupled with our overall risk tolerance. Control activitiesControl activities are established to ensure that risk responses are carried out effectively and consistently throughout the organization. This involves formalizing risk response in our Company policies, ensuring clear accountability, utilizing self-assessment and monitoring tools and designing controls into our systems and critical business processes. ‘To ensure that the risk response is followed consistently throughout the organization, Enterprise risk management functions may set policies, issue guidance and / or minimum standard that apply to all company business units globally. Risk management functions support the implementation of these policies and standards locally at business units and sites through development and deployment of self-assessment and monitoring tools that allow local management to understand where processes and controls are necessary, as well as where improvement may be required. Business unit management, in consultation with the appropriate risk management functions, will design and document action plans to implement or strengthen risk-mitigating activities, as applicable. Increasingly, as a best practice, systems and critical business process are designed and implemented to automate or “design in” compliance with these standards and other risk mitigation strategies. Information and communication Information and communication channels are in place to make the organization aware of risk that fall into their area of responsibility and expected behavior and actions to mitigate negative outcomes. Information and communication channels are place to make business leaders, as well as individuals, aware of risk that fall into their area of responsibility and the expected behavior to mitigate negative outcomes. Formal and informal training is conducted with applicable personnel. Information is provided to new hires and employees transferring to new functions on key processes applicable to their role. For many areas of risk, mandatory training is conducted annually. Knowledge is also exchanged within risk management functions through regular department meetings, short-term rotations through Corporate or enterprise functions and ad hoc cross-business unit assignments. Other relevant information is disseminated through directed communication and via intranet sites available to all employees. Rapid alerts or formal memos summarizing key learnings from incidents, common audit findings or other identified trends may be distributed across the impacted community to prevent similar events at other J&J business units or adverse events, control failures or critical unmitigated risk to be escalated to senior management and the proper authorities in a timely manner, Monitoring Management review, as well as assurance activities, such as testing, auditing and assessments, are in place to ensure that risk are effectively identified and assessed, and that appropriate responses, controls and preventive actions are in place. Critical to the company Enterprise Risk Management Framework is a review and reporting process to ensure risk are effectively assessed and appropriate risk responses and controls are in place. Testing, auditing and assessments are performed by independent, objective personnel to provide assurance that risk responses are consistently implemented, procedures are understood and followed, and appropriate controls are in place. Risk management functional leadership and business unit management monitor the effectiveness of the risk mitigation activities as well as the overall program effectiveness through review of metrics and dashboard on a periodic basis. Additionally, these measures are reviewed with the company Compliance Committee or other Enterprise governance teams, the Executive Committee and the Board of Directors. Each risk management function analyzes metrics, incidents, trends in auditing, testing and assessment results and other risk-related information to identify emerging risks, as well as ways to improve the risk management program including new controls, new or revised standards, or other initiatives.6. What are the benefits of ERM? Discuss. (Refer to S39 & S40) a) Alignment of risk appetite strategy. Management needs to consider the risk appetite of the organization (shareholders) and then aligned with the business strategies, b) Link growth, risk and return, Risk is part of the value creation and management will seek certain level of return for the undertaken risk. ©) Choose best risk responses. ERM helps the organization select the best response method to deal with risk, d) Minimize surprises and losses. ERM helps the organization to reduce the occurrence of unexpected problems. ) Identify” anid’ manage’ risk across the organization. Risk management is seen as everyone’s responsibility, experience and practice is shared across the business and a common set of tools and techniques are used. 1) Provicle responses to multiple risks, One system for many uses. 7. Discuss the The first step in the risk management process is to This process is to establish the strategic, organisational and risk management context in which the rest of the process will be take place. Then the criteria against which the risk will be evaluated should be established and the structure of the analysis is defined. The second step is the . This process is to identify the risk faced, how the risk arises, why the risks appear and when the risk surface in order to form the basis for further analysis. Then, steps 3 in the risk management process is the fiSk/AHAlySIS. The analysis should consider the range of potential consequences and how likely those consequences are to occur, The consequences and likelihood ay be combined to produce an estimated level of risk. The next step is the . In this step, a comparison is made on estimated risk against the pre-established criteria. This enables risks to be ranked so as to identify management priorities. If the levels of risk established are low, then the risks may fall into an accepted category and treatment may not be required. Steps 5 are the This step which is the risk should be treated in term of priority. For example, accept those risk is low priority like low risk and low impact.‘The sixth step in the risk management process is fMOnitOrng and FeVieWiNG ThE HSKS. This step is to monitor and review the performance of the risk management system and changes which might affect it. The last step in the risk management process is the Gommiuni¢ation and Consultation Of the nish. Communication and consult with internal and external stakeholders as appropriate at each stage of the risk management process and concerning the process as a whole. TUTORIAL 3 A) Identify and explain the business risks facing Jetz. Leasing of equipment & specialist staff As Jetz its equipment and the most specialized of its staff from another airline, there is a risk that its equipment and/ or pilots could be withdrawn leaving it unable to operate. Age of aircraft The aircraft being leased is old. This raises operational risk (it may suddenly breakdown and required for maintenance), finance risk (it may require regular repair and compliance risk (it may not meet the environment and safety standard) On Board services Customers are dissatisfied with the food provision on the flight and there is a risk that food prepared in Lyme may become less appealing and even dangerous when saved on a Darke to Lyme flight (when it has been prepared a substantial time earlier ) if the food make customers ill, Jetz might be faced with compensation claims. Safety The airline industry has stringent safety conditions and Jetz may faces customer boycotts/ difficulty in recognition if safety equipment standard are not met, as well as the threat and not allowed to fly. Fuel ‘The aircraft cannot fly without fuel, which can be a scare or high cost resource if fuel price escalate due to. world conditions, the company might not be able to meet the cost of operating. B. Recommend how the risks identified in (a) could be managed and maintained at an acceptable level byAnswer: Jetz must ensure that the terms of the contract with the international airline that the aircraft and staff cannot be withdrawn without reasonable notice, and that in the event of withdrawal, substitutes will be provided. 2) Jetz should have plans in place to be able to lease/ afford newer planes if required to by law. Jetz should manage cash flow and borrowing facilities so as to be able to afford ongoing maintenance when required. 3) Jetz should consider entering into a contract with a company in Darke to provide food for the Darke to Lyme journey. Obviously they must not breach any existing contract with the Lyme company and so in the meantime should review the type of food provided. For example, it might be safer to only offer cold food, for example sandwiches and cakes until a Darke contract can be set up. 4) Safety ‘The company should appoint a member of staff to be specifically responsible for safety operations (such as training, updating for legal requirements, educating passengers) and should ensure that staff are regularly appraised about safety issues. 5) Fuel The company could take out hedging contracts against the cost of fuel. Other than this, there is little they can do about this matter, and it is another risk that has to be accepted. EE ee and the evidence that should be available to (i Customer satisfaction: The airline should record customer satisfaction and have a target level of customer satisfaction which it hopes to achieve and maintain. This could be measured by customers completing questionnaires which ask them to rate the service, according to pre-designed ratings (for example poor, adequate, good, excellent). Evidence will include the completed questionnaires. (ii) Safety: The airline should have targets for safety, for example, number of accidents, number of staff achieving safety qualifications. The evidence will include accident log books and staff certificates and training records.TUTORIAL 4 1,Using the financial information below, determine the company’s stress position in terms of corporate failure. Additional information includes that the average share price for the period was RM1.40. Total current assets (TCA) 1,182,000 Total non-current assets 1,700,000 (TNCA) Total assets (TA) 2,882,000 Total current liabilities (TCL) 736,000 Total non-current lities 883,000 (TNCL) Total liabilities (TL) 1,619,000 Shareholders’ equity (SE) 109,000 Retained earnings (RE) 1,154,000 Number of shares issued 100,000 (NSD Profit before tax (PBT) 245,000 Sales (S) | 3,393,000 Inventory (1) | 435,000 Z-Score = ([Working Capital / Total Assets] x 1.2) + ({Retained Earnings / Total Assets] x 1.4) + ([Operating Eamings / Total Assets] x 3.3) + ([Market Capitalization / Total Liabilities] x 0.6) + ([Sales / Total Assets] x 1.0) Z-Score = (1.2 x 0.15 + 8) + (1.4 x 0.4004) + (3.3 x 0.085) +(0.0865 x 0.60) + (1.1773 x 0.999) = 2.2549 Sasa financial risk, credit risk and currency risk. Financial risk Financial risk is the soem to adverse events that erode profitability and in the extreme case A credit it risk is the risk of default on a debt that may arise from a borrower failing to make 11 Itis investments and their related interest and dividend payment streams, especially those securities denominated in foreign currency. Q3 Discuss the method to implement financial risk management. Develop financial discipline and internal control A good financial discipline allow you to conform your spending and saving to the plans that you have set to achieve your monetary goals and minimized financial loss. Second, establishing an ethical environment and setting the tone at the top of the organization allow each of the components work together to create a comprehensive system capable of deterring fraud, and preventing, detecting, and correcting problems based on an overall assessment of risk and exposure. Develop concise reporting tools A concise reporting tools help user to translate data into actionable information to develop strategies against any potential financial risk. Prepare cash budget A cash budget involves a realistic assessment of how much money you will have coming in during an upcoming period. Your determinations of how much money your business has available to spend are based on these forecasts, forcing you to spend within your means. It forces you to restrict discretionary purchases to items that you can pay for out of the cash you have on hand to avoid overspending. Purchase credit insurance ‘Trade Credit Insurance will protects your business with account receivable protection against losses due to credit risks such as customer’s insolvency, bankruptcy and failure to meet agreed payment terms and conditions. Thus, it gives you the confidence to grow your business by minimizing your credit risk exposure and improve your financial risk management.Monitor change in interest rate, inflation rate and exchange rate Generally, financial markets are volatile and unstable, and these could potentially result to losses for businesses and investors. A well monitoring of interest rate, inflation rate and exchange rate allow you to avoid financial risk and minimize the impact by quick responded. Q4 Discuss any three qualitative factors that predict corporate failures. 1. Decline in industry An industry which experiences negative growth, or remain stagnant due to decline in demand of one or more of its products for varied reason. This includes and is not limited to, a declining economy, downgrade or upgrade of a product, and changes in technology. For example, the Ry performed well until the introduction of compact discs, turning the audio cassette industry into a declining industry. 2. Poor organization culture Businesses depend on their employees to allow to profit and expand. Within a poor company culture, though, staff members are dnliKély'o perform/at high levels, thus they severely limit the company’s potential as well as their own professional growth. Employees who are not empowered by a company culture dedicated to their performance and salislacon often fall to develop ew sls and frequently are bereft of new ides. They are left to stagnate in a position that provides little satisfaction or room to grow. 3. Inability to response to changes Changes are implemented in a business environment for many reasons; for example, to contribute to better position for the organization in a competitive industry. An organization that (improve in technology, upgrade products and services, train employees to help them to upgrade their skills so they can implement them in the new changed system.) Qs Discuss how Management of risk is an and Learning how to by identifying and analyzing the range of issues and providing a systematic way to make informed decisions. So the primary objective of a business is to maximize wealth of its shareholders. For example, the companies regularly face the decision of allocating net revenues (profits between retained earnings and dividends or share buy-backs. A central issue is the pear . A firm can finance new projects orinvestments through either internal (retained) or external capital resources. Under the theory of perfect capital markets, a firm should distribute all eamings it does not need in the immediate future and simpl e to finance new initiatives. However, in the real world, . Even worse, if a firm finds itself in potential investors may be TUTORIAL 5 (a) Identify and explain four business risk that are faced by Seatrans which should be. assessed, Right to operate The exclusive rights to operate are only effective for another 5 and half years. Depending on the likelihood of these rights being renegotiated this raises question about the ongoing viability of the business. The right to operate may have been granted provided that certain conditions are met. If Seatrans does not continue to satisfy these terms its operational existence maybe called ‘into ae Itis likely that running costs will be higher than those for newer ships. Fuel consumption is likely to be higher as the engines will be less efficient. This is of particular concern in periods when fuel sis are volatile. Ongoing maintenance is also more likely required. The company will be required to meet the emission standards which come into force in 20X6. If the necessary modifications are not made the company could incur substantial penalties. The quality of outsources services is outside the direct control of Seatrans. Seatrans may receive complaints and ultimately lose customers if services are poor. 0) The first risk which is rights of operate could be managed by Seatrans in which they can purchased not only one but another exclusive rights. This rights enable Seatrans to make not only three return crossings but at leat six return crossings every day of the year. The second risk which is the age of the ferries, safety risk could be managed by Seatrans in which they can purchased a new types of ferries instead of the 20 year old boats to service the route. This risk is maintained at an acceptable level which no need to refurbish.The third risk which is the emission standard, compliance risk could be managed by Seatrans which they need to buy a new boats which must meet guidelines and reqirements of Environment Protection Regulations that come into force in two years’ time in 20x6. The last risk which is the franchises agreement could be managed by Seatrans which the hot and cold refreshments and travel booking facilities provided by the independent businesses can on a mutual agreement basis. For example, signing the agreement in one year basis and this risk can be surely maintained at an acceptable level by Seatrans TUTORIAL 6 1. What is a risk register and what is the importance of risk registers to an organization? Answer: A risk register (or risk log) is a scatterplot used as risk management tool and to fulfill regulatory compliance acting as a repository for all risks identified and includes additional information about each risk, e.g. nature of the risk, reference and owner, mitigation measures. To be effective, an organization's risk management plan requires the development and maintenance of an ongoing process that enables the identification, analysis, evaluation, and treatment of risks that may impact the organization. This knowledge further enables the prioritization of actions to reduce these risks to an acceptable level. What results from this risk management process is a substantial amount of risk management information that needs to be managed in such a way that it can be found and applied quickly and efficiently. Alternative (comprehensive) solution: One method that organizations can use to manage their risk management information is to make use of what is called a risk register, also known as a risk log. The risk register serves as a central repository for the organization's risk information and allows for the information that results from the risk management process to be suitably sorted, standardized, and merged for relevance to the appropriate level of management. Its key function is to provide management, the board, and key stakeholders with significant information on the main risks faced by the organization. The risk register also gives the organization's risk management stakeholders a clear view of the current status of each risk, at any point in time.