Managing financial risk

Competency

Evaluate the principles of risk and reward in the investment sector and their applications to the broader area of risk management.

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.

LTD Acceptance has 18,000 active policies in its book of business, and the firm is yet to experience a year period with high loss ratios. To increase its profitability ratios, LTD has invested the premium dollars across various asset classes. LTD’s Chief Financial Officer (CFO) believes the organization should take a calculated risk and allocate the assets more aggressively. As the senior risk analyst, you have carefully analyzed the organization’s numbers and strongly believe that LTD’s favorable loss ratios are a result of chance and not through the sensible use of the firm’s systematic framework for managing risk. You also believe the CFO is purely looking at the rewards and not the risks. Therefore, you do not believe the firm should increase risk exposures at this time.

To convey your point of view, you have decided to conduct a cost-benefit analysis report which should include the following:

  • For this report, provide an introduction which discusses the relationship between risk and reward. Using the information provided in the background of this case, explain why the organization may appear to be in a better position on paper than it really is.
  • Include at least two ways how each party listed below can be adversely impacted if the organization suffers losses as a result of a more aggressive approach.
    • Policyholders
    • Shareholders
    • Vendors
    • Creditors
    • Employees
  • Also include a discussion on how effective financial management aligns with overall risk management.
  • Your conclusion should highlight how the risk assumed in an organization’s activities should be consistent with its long term goals. All business activities include inherent risks. Thus, all the activities and risks the firm takes should help them reach their long-term goals. If the managers engage in activities that create risks outside of this scope, it can create problems. For instance, most firms have the goal of driving sustainability. However, if they are highly leveraged, then seeking additional credit for a project can derail the long term goal of sustainability.
  • The format for your report should be in the business, professional style.

F F C B A
0 1 2 3 4
Not Submitted No Pass Competence Proficiency Mastery
Not Submitted No introduction OR the introduction does not adequately discuss the relationship between risk and reward. Introduction discusses the relationship between risk and reward. Introduction provides a detailed discussion of the relationship between risk and reward. Introduction provides a thorough and detailed discussion of the relationship between risk and reward that includes context specific examples.
Not Submitted No information provided in the background of the case is used to describe why the organization may appear to be in a better position than it actually is OR the information is applied incorrectly. Information provided in the background of the case is used to describe why the organization may appear to be in a better position than it actually is. All available information provided in the background of the case is used to describe why the organization may appear to be in a better position than it actually is. All information from the background of the case is used to thoroughly describe why the organization may appear to be in a better position than it actually is.
Not Submitted Less than two valid ways that any of the listed parties can be adversely impacted if the organization suffers losses are provided. At least two ways that each party can be adversely impacted if the organization suffers losses are provided. At least two ways that each party can be adversely impacted if the organization suffers losses are thoroughly discussed. More than two ways that each party can be adversely impacted if the organization suffers losses are thoroughly discussed.
Not Submitted Conclusion does not accurately align effective financial management with risk management. Conclusion aligns effective financial management with risk management. Conclusion aligns effective financial management with risk management with the use of context specific examples. Conclusion aligns effective financial management with risk management with a thorough discussion and through the use of context specific examples.
Not Submitted Conclusion does not accurately discuss how assumed risk from the organization’s activities should be consistent with long term goals. Conclusion includes a discussion how assumed risk from the organization’s activities should be consistent with long term goals. Conclusion includes a discussion how assumed risk from the organization’s activities should be consistent with long term goals with the use of context specific examples. Conclusion includes a thorough and detailed discussion how assumed risk from the organization’s activities should be consistent with long term goals with the use of context specific examples.

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