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Defining and categorizing various forms of risks
Competency
Construct a framework for identifying, evaluating, and categorizing risk and risk management tools.
Instructions
LTD Acceptance is a private property and auto insurance carrier that specializes in sports cars and motorcycles. This organization is owned by LTD Capital, a large equity group with over 15 holdings. LTD Acceptance is the parent company’s single largest holding as it drives 70% of total revenue. Due to the inherent risk involved in that segment of the market, many of LTD Acceptance’s competitors do not offer policies for sports cars or motorcycles. This market segment is underserved which is why the organization has 20,000 active policies for a sports car or a motorcycle.
LTD is headquartered in Houston, TX. LTD does not sell insurance directly to the public. Instead, it uses third-party agents to sell its policies. LTD handles all customer service needs including claims intake, policy services, and general questions. The company operates in four states: California, Texas, Louisiana, and Florida. Currently, LTD does not have an active system in place to ensure that its agents are in fact using LTD guidelines to screen potential policyholders. However, no evidence of negligence has emerged so far as the organization has yet to have a year in which it was not profitable. LTD has also had the good fortune of not suffering losses because of natural disasters or catastrophic events.
In your first days of your new role as the senior risk analyst, you know your first task is to complete a framework for adequately identifying risk exposures. During this process, you realize that many of your counterparts lack the basic understanding of how to identify risks. Your supervisor has come to you and asked for a report outlining the importance of identifying risks to support risk management activities and positively impact the company’s bottom line. If your counterparts do not understand your report, you know that you will have minimal support in your efforts to manage the organization’s risks effectively.
For your report, you have been asked to analyze and address the following:
Why is identifying risk exposures significant? What are the ramifications for organizations that fail to properly identify risks they are exposed to?
What are the market risks LTD encounters?
What business risk does LTD encounter in its day-to-day operations?
What compliance and human capital risks might LTD face?
How do risk management activities correlate with overall productivity?The format for your report should be in the business, professional style. For help with this format, please click here.

 

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Defining and Categorizing Various Forms of Risks

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Defining and Categorizing Various Forms of Risks

LTD Acceptance has been operating successfully without a risk mitigation plan in place. Although a major crisis has not arisen out of this omission, it might be looming, especially given that the company serves its clients via proxies. This danger underlines the significance of having a risk mitigating framework in place that will aid in overcoming any threats that crop up.

Importance of Risk Identification

Highlighting the apparent risks that may encounter the organization is a significant process. When operational risks are not identified at their formative stage, there is a chance that normal functioning will be hampered. Also, the workforce may be subject to encountering risks. If affected, execution of their mandated duties is curtailed and thus operations will also stall. Failure to identify risks also means that the business cannot accurately define its objectives. Doing so without a risk identification framework would be a recipe for failure as risks can completely damage the company’s operations.

Market Risks

There are several market risks that LTD Acceptance may face and therefore the need of having an identification framework in place. For example, the interest rates at which the company prices its premiums can be affected by a shift in the monetary policy (Leybag, 2018). Also, there is the foreign exchange risks that are likely to impact the company as it deals in automobiles that are subject to importation. The other market risk is commodity price. For example, the price of commodities such as fuel may rise and stay high for a prolonged period (Leybag, 2018). This will impact the automobile owners who may be unwilling or incapable of paying insurance premium rates that they deem high.

Business Risks

The company is also not immune to business risks and faces a couple of them in day to day operations. Economic risks are commonplace whereby there are downturns in the performance of the economy (Boitnott, 2019). This affects businesses tremendously and LTD Acceptance has to be economically set for such occasions. LTD Acceptance also faces security risks in their day to day operations and there is the chance that one such risk could grow in proportion. Without an effective client data protection policy, hackers may access it and use the data for malicious intents (Boitnott, 2019). Lastly, financial risks are capable of ultimately weighing down on the company. If it is paying more in compensations than the received premiums, there is a danger of going bankrupt.

Compliance and human capital risks

Compliance is also a major business risk that could affect LTD Acceptance. If the firm has not placed measures of ensuring that there is compliance, there is the chance of the authorities causing the closure of the business or else impose heavy financial sanctions and penalties. Human capital risk concerns the type of damage that the employees may bring to the company in terms of reputation, morale and even the revenue. There is a significant human capital risk at LTD Acceptance suppose there are no measures of training and passing down the company’s values to the workers. This is, especially, posed by the distant level of contact between the company and the agents.

Risk Mitigation and Overall Productivity

Managing risk is an imperative process for any business that intends to stay afloat for an extensive period while still remaining profitable. Having a way of overcoming the probable dangers implies that business productivity will not affected. For instance, having mitigating measures on the economic risks means that slumps in economic performance will in no way affect the business. Also, curtailing the human capital risk will lead to increased revenues and create a good impression of the company. This is imperative for keeping competition at bay.

References

Boitnott, J. (2019). 7 Business Risks Every Business Should Plan For. Business Class: Trends and Insights | American Express. Retrieved 11 January 2021, from https://www.americanexpress.com/en-us/business/trends-and-insights/articles/7-business-risks-every-business-should-plan-for/.

Leybag, J. (2018). Market risk basics. Mybusiness.com.au. Retrieved 11 January 2021, from https://www.mybusiness.com.au/finance/4228-market-risk-basics#:~:text=Simply%20put%2C%20market%20risk%20or,interest%20rates%20and%20political%20unrest.

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