FOUNDATIONS OF RISK MANAGEMENT - SCS 2921-172

ASSIGNMENT
DUE: December 4, 2022 (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: Gustavo A. Moreno

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

1 Workers Compensation Provides medical and wage A employee that
& Employer’s Liability replacement in the event of gets burn in the
Insurance injury or illness incurred in the kitchen making
workplace and provides pizza.
coverage in case an employee A employee that
sues the employer sues the employer
because he fires
him or she.

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 2 Property Coverage in case of a fire, A fire in the pizza
riot, lighting, explosion in the restaurant.
property.
3 Machine Breakdown Coverage for machinery and One of the oven for
equipment breakdown. making pizza
breakdown.
4 Crime Insurance Coverage for employee’s An employee that
theft, fraud. steals money from
Also, burglars the cashier or is
committing fraud by
making fake
invoices.

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

1 Supply Chain Supply chain ofMaterials to make
products, materialspizza such as
needed for the business tomato sauce that
to work can become come from China
scarce or more difficult can be harder to
to get because of the get and more
restrictions of COVID expensive.
2 High Inflation Rise of prices for Because of inflation
materials and products the cost of the
needed for the business materials to make
to make their final pizza may rise
product these may lead having to raise the
to a rise in the price. price of pizza this
could lead to
people not wanting
to buy pizza.
3 Political Environment Govermental actions Lockdowns
such as lockdowns and because of Covid
curfews might affect the restricting the
business activity. amount of people
that can be out

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 might reduce the
sales of pizza
having impact in
the income of the
restaurant.

Question 2 (10 marks)

a) What does a 5% Value at Risk (VaR) of $1 million mean?

Answer:
That there is only a 5% chance that there will be a loss of $1 million or more.

b) Explain what is meant when an organization has an Earnings at Risk (EaR) of

$500,000 with 95% confidence.

Answer:
It means that the earnings are projected to be $500,000 or greater 95% of the time
and less than $500,000 5% of the time.

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:

The company´s Market Value Surplus (MVS) is 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 company’s economic capital is $10 million.

ii) Does Sector Insurance have excess capital or a deficiency in capital?

Answer:

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It has an excess capital because its MVS its greater than its economic capital.

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
1 Identifying loss exposure Identification of loss Inspections, internal
exposures by control audit, risk
reviewing historical assessment checklist.
losses.
2 Analyzing loss exposure Loss exposure is  The number of
analyze considering losses in a
four dimensions: specific time
1. Loss period.
Frequency
2. Loss Severity
3. Total Dollar
Loss
4. Timing
3 Examining feasibility Evaluation of the Evaluation of risk
available risk control control techniques
techniques for each such as insurance
loss exposure and
whether they are
suitable for the
organization.
4 Selecting appropriate risk The process of forecast of the
management technique selecting a risk dimensions of
management expected losses
technique based on
the potential costs of
loss exposures not
being covered versus
the cost of applying a
risk management
technique
5 Implementing selected risk Implementation of the  Insurance
management technique risk management purchase
technique selected.  Maintenance
Program

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 6 Monitoring results Revision of the risk  A new
program by regulation
monitoring  A product
:1. New loss defect that
exposures results in a
2. New developments liability
in existing loss
exposures
3. Different risk
management
techniques

b) Describe how loss exposures are analyzed in the traditional risk management
process and provide an example.

Answer:

Loss exposures are analyze considering four dimensions:

1. Loss Frequency: is the number of losses within a specific time period

example: number of car accidents.
2. Loss Severity: the amount, in money, of a loss for a specific occurrence
Example: How sever was the car accident.
3. Total Dollar Loss: the total dollar amount of losses for all occurrences during a
specific time
Example: amount of how it cost the car crash.
Timing: when losses occur and when loss payments are made
Example: When did the car crash happen a year ago? Two years?

c) Describe the major differences between the enterprise-wide risk management

process and the traditional risk management process and provide an example for
each.

Answer:

Traditional Risk Enterprise Risk Management Example

Focus on Hazard Risk
Focus on entire organization Traditional risk will only focus
risks both business and on risk such damage to
hazard property ERM will focus in all
risks such as
financial,strategic, operational

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 and hazard.
Focus on value of accidental Strategic Management gain or Traditional risk will focus on
loss loss the risk of inflation just on how
much it can lose ERM will
focus on opportunities if there
are on how they can use
inflation to their favor
Focus on specific loss Focus on value of the If there is a political risk in a
exposure organization country where you have
operations a traditional risk
actions will avoid and get out
of there ERM will analyze if it
is convenient for the
organization to stay (accept
the risk ) or not.
Focus on return to pre-loss Focus on restoring productive On traditional risk if a new
condition potential product has to many risk it will
consider not to launch it in
ERM they will consider what
risk of the product could be an
opportunity.

Question 4 (10 marks)

a) Over several years, (1) one plant employee in every (40) forty employed by Rebel
Tuna Packaging has been involved in a slip and fall on the plant floor each year. In
(3) three of every (4) four such falls, the employee has been unhurt. Of those
employees who have been hurt, (8) eight out of (10) ten have been severely
injured, and (2) two out of (10) ten have been killed.

Based on this information, what is the probability that a randomly selected

employee will experience each of the following this year?

i. A slip and fall on the floor.

Answer:

0.025

ii. A slip and fall on the floor where an employee is unhurt

Answer:

0.75

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 iii. A slip and fall on the floor where an employee is injured but not killed.

Answer:

0.80

Question 5 - Marks: 25

Saram Molding Corporation is purchasing a new molding machine for $15,400. Its
annual output will bring in $3,000 more revenue than the old machine it is replacing.
The old machine has no salvage value; nor will the new machine at the end of its
seven-year estimated useful life. The new machine costs $1,000 less per year to
operate than did the old machine. The income tax rate is 50 percent.

1. Will the new machine have a positive net present value if the minimum acceptable
rate of return is 14 percent per year compounded annually? (Factor = 4.288) Show
your calculations

Answer:
Additional Revenues: 3,000
Savings in operate: 1,000

Before Tax Net Cash Flow: 4,000

Depreciation: 2,200
Taxable Income= 1,800
Income Tax (50%) = 900

After Tax Net Cash Flow = 3,100 X 4.2888

= 13,295.28
Investment = 15,400
Net Present Value = -2,104.72

The new machine does not have a positive net present value.

2. Assume the $3,000 of additional annual revenue from the new machine is not
known with certainty. If the following probability distribution applies to each year's
additional revenue from the new machine and management wants to make its
decisions on the basis of the expected value of this additional revenue, should
Saram Molding Corporation invest in the new machine? Show your calculations

Probability Additional Revenue

0.10 $ 2,000
0.20 3,000
0.40 3,600

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 0.15 5,000
0.10 8,000
0.05 10,000

Answer:

Probability Revenue Expected Revenue

0.1 2000 200
0.2 3000 600
0.4 3600 1440
0.15 5000 750
0.1 8000 800
0.05 10000 500
    4290

Additional Revenues: 4,290

Savings in operate: 1,000
Before Tax Net Cash Flow: 5,290
Depreciation: 2,200
Taxable Income= 3,090
Income Tax (50%) = 1,545

After Tax Net Cash Flow = 3,745 X 4.2888

= 16,061.56
Investment = 15,400
Net Present Value = 661.56

With this net present value being positive the company should invest in the new
machine.

3. Assume that, at the end of the seven years' useful life of the machine, Saram
Molding Corporation’s management finds that the machine did, in fact, generate
the following amounts of additional revenue in the indicated years:

Year Additional Revenue

1 $8,000
2 7,000
3 6,000
4 5,000
5 4,000

Discounted at (10) ten percent compounded interest per year, what is the present
value of this actual stream of additional revenue? Show your calculations.

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Answer:

Additional
Year Revenue Present Value Factor Present Value
1 8000 0.9091 7272.8
2 7000 0.8264 5784.8
3 6000 0.7513 4507.8
4 5000 0.683 3415
5 4000 0.6209 2483.6

      23,464.00

Present value is $23,464.

Question 6- Marks: 25
1. Roadall, a large road construction firm that operates in three provinces, is
considering the purchase of ten newly designed, heavy-duty road graders to
replace its current fleet. One of the advantages of these new road graders is their
increased stability, which Roadall believes will cut in half the frequency with which
graders roll over, injuring or killing operators. Such injuries and fatalities have
proved a significant loss exposure for Roadall. Additional advantages of these new
graders are that they are more fuel-efficient and productive than the graders
Roadall is now using.

The new graders, which Roadall can purchase for $40,000 each, can be expected
to have a useful life of seven years, with no salvage value. If Roadall management
wishes to earn an annual after tax, time adjusted rate of return of at least 16% on
its funds, compute the minimum after-tax cash flow that each grader would have to
generate to attain this rate of return. (For 16%, 7 years, the present value factor is
4.039).

Answer:
Each Raider will have to generate 161,560.

2. The present value of $1.00 to be received five years hence is $0.681 at 8 percent
interest per year compounded annually. The present value of $1.00 to be received
at the end of each of the next five years is $3.993 if the interest rate is 8 percent
per year compounded annually. Refer to Tables on pages 10.10 and10.14 to
confirm the above statement.

At 8 percent interest per year, compounded annually, compute:

a. The present value of $100 to be received (24) twenty-four months from now;

Answer:

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 85.73

b. The present value of $60 to be received at the end of each of the next (7)
seven years.

Answer:
312.36

c. The combined present value of $50 to be received (1) one year hence; $38 (2)
two years hence; and $100 (5) five years hence, with no money being received
in the third and fourth years.

Answer:
146.96

Question 7- Marks: 10

Zing-Zang Ziplining

Referring to the Confusion Matrix, apply the Predictive Model to Zing-Zang Ziplining’s
2018 customer injury data. In 2018, 18,180 customers attended the gym and 316
were injured. How often did the model correctly and incorrectly predict for each
customer “yes, will have an accident” or “no, will not have an accident”?

Predicted No + Predicted Yes = Total (18,180)

Actual No 17,800 64 17,864
Actual Yes 36 280 316

1. Identify:
Answer:

Identify
a. the True Positives 280
b. the True Negatives 17,800
c. the False Positives 64

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d. the False Negatives 36

2. Calculate the Accuracy

Answer:

0.994

3. Calculate the Precision

Answer:

0.814

4. Calculate the Recall

Answer:

0.886

5. Calculate the F-score

Answer:

0.848

Final Submission: Submit in Word or PDF (do not use “Pages”)

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