[FAP Risk in Actuarial Problems End-of-Module Assessment]

Instructions: You must enter your answers to each assessment question in the sections
noted below, and must not change any information contained within the black brackets [].

[Task 1]
3ksat

ERM Process Summary

Al Nino
Risk Consultant
16th August 2023

I. Introduction
The purpose of this handout is to provide a summary of the ERM proposal including the
objective, benefits, and outcome of the process to the Board of Directors at Warren Peace
(WP).

II. Purpose of ERM

 Enterprise Risk Management (ERM) framework is a holistic approach that
considers the company’s exposure to various risks and their potential impact on
the overall objective.
 WP’s profits have been noted to be volatile over the last few years due to high
exposure to varied risks.
 ERM would help the organization to identify the exposed risks and minimize the
severity of negative events through risk management actions.
 It would also improve the decision making and streamline the operations process
which would lead to increased innovation and agility.
 With the reduced risks and improved management of the enterprise, the reputation
of the company would be improved, and the company would benefit from the
positive brand value.
 Demonstrating a robust ERM framework can enhance the stakeholder relation as
it shows the company’s ability to manage risks, reduce volatility and increase
profitability.
 In addition to addressing risks, ERM would also provide an opportunity for
growth and improvement to expand the business.

III. Benefits of ERM to Stakeholders

 The Peace family –
o ERM implementation would improve the business performance by
controlling the risks and focus on growing opportunities.
o It also targets to reach desired profit goals for an organization.

Risk in Actuarial Problems EMA – page 1

 o Improved financial stability of the company and hence improved financial
returns.
o More opportunities to grow and expand the business with higher returns
and maintenance of positive customer relation.
o Long term stability of the company by ensuring the company’s value
remains feasible.

 WP’s Employees –
o With more streamlined operation process, employees will benefit from
enhanced job security and growth.
o ERM also focuses on effective allocation of resources to address the
identified risks and encourage cross functional collaboration.
o Opportunity of financial gain as the organization continues to grow and
hence financial motivation to stay aligned with the organization’s goals.
o

 Wholesale distributors –
o Availability of efficient supply chain by reducing the risks of disruption
in product availability or production process.
o Focus on product availability and quality through ERM would help in
maintaining customer satisfaction and loyalty.
o Strategic planning to support distributors to target long-term growth
aligned with organization’s goals.
o The company and distributors can work together to develop effective risk
mitigation strategies and enhance the resilience of distribution network.
o Share the ERM tools with the distributor to minimize risks to their own
operations.
o Benefit from long term relationship.

 Business partners –
o Business partners associated with the companies that value ERM may
gain a competitive edge.
o Partners can differentiate themselves by offering stable and resilient
collaboration.
o ERM encourages transparent communication and exchange of
information. Partners can benefit from each other’s experiences and
knowledges for better informed decisions.
o Supports long term sustainable business relationship.
o Partners would benefit from the financial gains earned from the improved
business performance.

 Creditors –
o Reduced probability of loan default resulting from decreased risk
volatility that may otherwise cause failure to meet loan obligations or
credit agreements.

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 o Creditors can have greater confidence in company’s repayment ability
from the financial stability expected with the implementation of ERM.
o Companies with strong ERM framework may be perceived as lower risk
by creditors which could result in favorable borrowing terms such as
lower interest rates.

 Customers –
o Customers can rely on consistent and high-quality products that meet
their expectations and provide more satisfaction.
o Improved customer support with faster resolution time with the help of
ERM preparedness for potential challenges.
o ERM also addresses cybersecurity and data privacy risks and hence
improved data security to customers.
o Ethical and responsible operational practices to avoid any compliance
issue.
o Customer centric approach as ERM helps in prioritizing consumers’
needs and satisfaction.

IV. ERM Team

The responsibility of ERM framework falls upon:

 Chief Executive Officer (CEO) –

o Responsible for key risks and holds decision making power.

 Chief Risk Officer (CRO) –

o Responsible for providing CEO with quarterly written risk report.
o Status report of company’s ability of risk tolerance and risk appetite for
each quarter.
o Responsible for managing and monitoring risk models of the company.

 ERM Committee –
o It’s a subset of work force and requires representation from each
department such as marketing, production, and distribution.
o Responsible for reviewing and recommending risk tolerance of the
organization.

V. ERM Framework
 WP has been suggested to follow the “Company Value (CV)” ERM approach to
monitor the risks.
 The baseline CV refers to the present value of distributable cash flows over 10-
years.
 Company’s objective is to maximize CV through increasing profit margins and
reduced risk exposure.
 Based on the CV, the risk tolerance for WP is defined as target risk & maximum
risk.

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  If the CV meets the target value, then the company is comfortable with overall
risk situation and no action would be needed.
 If the CV exceeds the target value but is within the maximum range, then the
company would focus on reducing the exposure, but no immediate action needed.
 If the CV exceeds the maximum range, then immediate action needs to be taken
to reduce the risk exposure.

VI. Addressing Board’s Concerns

 The board at WP focuses on quality production of wines which would be ensured
with the continuous monitoring under the ERM framework.
 The framework provides a clear and transparent view of risks, allowing the board
to make informed decisions.
 The board’s concerns about whether the company’s risks are aligned with the
overall goals are addressed.
 This framework also focuses on evaluating risks and analyzing the criticality that
could affect company’s success.
 The risks are factored into decisions, leading to well-informed and balances
choices.
 ERM process also helps the board to anticipate potential crises and respond
effectively to unexpected events, avoiding any business or reputational
consequences.
 With the appropriate risk identification and mitigations plans, the board can focus
on maximizing the company value through profit margins.

VII. Summary
The ERM framework ensures that risks are identified, evaluated, and managed in a way
that aligns with the company’s goals, enhances decision making and promotes
transparency and accountability.

Risk in Actuarial Problems EMA – page 4

[Task 2]
3ksat

MEMO

Date: 17th August 2023

TO: Melissa Peace, CRO
FROM: Al Nino, Risk Consultant
Subject: Exposed Risks of WP Winery and Proposed Mitigation Strategies

Introduction

This memo will provide a comprehensive summary of the identified risks based on ERM
committee’s investigation that have significantly impacted WP’s profits over the past
year, along with the impact from proposed strategies to effectively mitigate the same.

Key identified risks impacting the profitability are:

 Competitor risk
 Demographic (Weather) risk
 Production risk

Below sections cover the detailed information for each of the listed risks.

Mitigation Strategies

To address the identified risks, following strategies have been evaluated:

 Sales Contract – Entering into a sales contract with the primary distributor to
ensure the purchased of a fixed amount of wine over the next 10 years at a
discounted price. This plan is targeted to avoid losing the key distributor to
competing wineries.
The approach provides fixed revenue stream and helps mitigate the risk of sudden
drops in sales due to customer fluctuations or market downturns. By securing a
consistent revenue source, WP Winery can more effectively plan its operations.

However, this could include the restriction of sales to other potential customers
and the opportunity to respond to changing market dynamics over the contract
term. Over a prolonged period, market trends and customer preferences might
undergo significant changes, potentially rendering the agreed-upon terms less
favorable or outdated.

Risk in Actuarial Problems EMA – page 5

  Diversification – Leasing out a portion of WP’s vineyard to fund renting space in
vineyards in various locations will help the company to avoid geographical risks,
potentially overcoming the impact from local weather-related changes. This
strategy targets to diversify the revenue source and ensure the continuity of
quality production of wines to maintain the brand value, thereby contributing to
the market standing and maintaining customer satisfaction.

However, the other challenges associated with the transportation of the grapes
from the new vineyards to the main location should be considered carefully. The
financial implication must be evaluated to understand the cost-benefit relation
from the proposed change. There are further risks such as accidental or spoilage
of grapes which would impact the production activity. The associated costs and
risks need to be assessed and considered prior of implementing the strategy.

 Equipment Update – Investing in new equipment and maintenance workers to

reduce the likelihood and severity of expensive repairs to minimize the
disruptions during the production process. This strategy has the potential to
enhance operational efficiency, reduce downtime and improve product quality.
This would also increase the production capacity for the winery to mass produce
the wines and thus helping the company in the geographical expansion.

However, the initial expense to acquire the updated machineries should be

considered and compared with the expected future benefits to ensure that the
savings outweigh the expected costs in long run and thus benefiting the company
with this strategy.

Impact on Company’s Profitability from Individual Strategies

Using a statistical model to allow for various economic situations, expected performance
of the company has been projected for the next 10 years assuming the risk mitigation
strategies to improve the profitability. This analysis has been performed individually for
each risk to understand the impact on company’s profits.

Below is the graphical summary of the same:

Risk in Actuarial Problems EMA – page 6

The graph above illustrates the contrast between the initial state (without risk
management measures) and the impact of each mitigation strategy. As observed, the
introduction of these strategies is projected to lead to reduced profits, posisbly owing to
the initial costs linked to each course of action.

A significant decline in profits has been noted following the adoption of the sales contract
for a fixed 10-year period. This could be investigated further to understand the underlying
cause of such variance. Whereas the impact from the other two strategies is similar to the
current expectation and might be acceptable with minimal intervention.

For each of the standalone risks, an additional parameter has been analyzed to check the
comptability with company’s risk tolerance thresholds. It has been observed that despite
the mitigation strategies, company’s risk tolerance is still exceeding the maximum limit
and will require to closely monitor the performance and focus on further reducing these
risks.

Impact on Company’s Profitability from all Risk Strategies

The overall impact on the company’s profitability has also been assessed assuming the
implementation of all three risk strategies together.

This information has been summarized in the table below, presenting the expected
profitability along with the expected measure of volatility. It has been noted that while
the decline in profits aligns with the individual effects, it is evident that the volatility is
projected to decrease after the implementation of the mitigation strategies, ensuring a
more stable flow of profits.

Without Mitigation With Mitigation

Expected Profits $ 3,787,198 $ 2,642,596

Risk in Actuarial Problems EMA – page 7

Average Profits $ 3,322,696 $ 2,523,963
Volatility Measure 749,150 442,854

Furthermore, it’s worth highlighting that the average profit is more closely aligned with
the latter column, providing further evidence of a more secure and consistent profit
stream.

Conclusion

This memo has outlined the possible mitigation plans and their respective effect on the
company’s future financial performance. While the projected profits may be lower, the
company can expect reduced profit volatility, providing more opportunities for growth
and expansion in line with company’s objective and risk tolerance.

It is also important to note that risk management is an ongoing process, and the
implementation of these strategies should be accompanied by continuous monitoring and
adjustment. By addressing these strategies, WP Winery is likely to enhance its resilience
against the identified key risks and move towards a more stable and profitable stream of
cash flows but would still require further investigation to lower the exposure to specific
risks.

Risk in Actuarial Problems EMA – page 8