Annie CRM Assignment

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University of Toronto *

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2921

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Computer Science

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Apr 3, 2024

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FOUNDATIONS OF RISK MANAGEMENT - SCS 2921-184 ASSIGNMENT DUE: December 3, 2023 (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: XINYI CHEN 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 of Policy 1 Property Insurance Property insurance can cover the potential financial loss of commercial real estate of restaurant such as building of restaurant. Building and Personal Property insurance, Fire and Natural Forces insurance 2 Liability Insurance Liability Insurance covers an organization’s liability except for motor vehicles. Aircraft, General liability insurance, business liability insurance

and specific exclusions. 3 Motor Vehicle Insurance Motor Vehicle insurance covers the property or liability of an organization’s autos and vehicles. Business auto insurance, l and vehicle insurance 4 Occupational Injury and Disease Insurance Occupational Injury and Disease insurance covers the potential loss from incidents at workplace/restaurant. Employer’s liability insurance, Workers compensation insurance, medical insurance 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 of Strategic Risk 1 Economic environment risk This risk refers to the overall economic environmental risk that the pizza restaurant would encounter during the Covid which will cast pressure on the daily operation of the restaurant. Financial crisis – insufficient capital/fund injection will cause hardship of running business and operations. Short industry demand – less consumer and spending resulting in less revenue, therefore less profit. Inflation – Covid could cause inflation, the increased food price will increase the overall cost production, increased labor cost will increase the overall operation cost, ultimately decrease the profit. 2 Demographics risk This risk refers to the potential decreased number of human population(customer) the restaurant intends to Labor shortage – The Covid has a negative impact on employee productivity and few people are willing to work on site. 2

serve. Increased employee health care and medical expense – Covid created more awareness among employees, they will ask for more coverage of health and medical care. 3 Political Environment risk This risk refers to the impact the government has on an organization. Government regulations – government may introduce new regulations in order to ensure the health factors which will cause more expense on organization. Increased taxation – Government may have deficit because of the Covid, so the government may tax more on business, this will potentially result in less profit of organization. Question 2 (10 marks) a) What does a 5% Value at Risk (VaR) of $1 million mean? Answer: It means that there is a 5 percent of losing $1 million or more of the total value of asset in the given period. b) Explain what is meant when an organization has an Earnings at Risk (EaR) of $500,000 with 95% confidence. Answer: The organization’s earning is projected to be $500, 000 or greater 95 percent of the time and less than $500,000 5 percent of the time. 3

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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: MVS = Fair Value of Asset – Fair Value of Liability = Fair Value of Asset – (Present Value of Liability + MV margin) = $110 – ($90 + $6) =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 economic capital of the company is $10 million since they have 0.5 percent probability of losing at least $10 million in capital. ii) Does Sector Insurance have excess capital or a deficiency in capital? Answer: Capital Surplus = MVS – Economic Capital = $14 - $10 = $4 million Sector Insurance has excess capital (capital surplus) of $4 million. 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 of Step 1 Identification It refers to identifying potential risks in the management process and creates a list of Loss of important suppliers; new and changing regulations; reputational and 4

organization’s risk. compliance risks. 2 Analyzing It refers to analyzing organization’s risk identified by first step by 4 dimensions which are loss frequency; loss severity; total dollar loss; timing. Assessing the frequency of breach of contract from a third party. 3 Examining feasibility It refers to applying the risk financing or the risk control technique in order to mitigate the risk. Having a CRO to build up the risk policy and framework, continuously monitoring the effectiveness within the entire organization. 4 Selecting It refers to selecting an appropriate risk management techniques based on organization’s risk appetite and financial position. Selecting the appropriate insurance to transfer the risk. 5 Implementing It refers to implementing the risk management technique being selected. Ensuring the insurance premium is paid, establishing the communication within the whole organization to ensure a successful implementation. 6 Monitoring It refers to monitoring the effectiveness of risk management implementation Conducting quarterly quiz within work streams all over the organization. b) Describe how loss exposures are analyzed in the traditional risk management process and provide an example . Answer: Loss exposure in the traditional risk management process is analyzed based on four dimensions which are: 5

The frequency of losses – This refers to the number of losses within a specific time period. For example, assessing the frequency of a property can be damaged, liability claims can arise. The severity of losses - This indicates the amount, in dollars, of a loss for a specific occurrence. For example, s property damage which cause a loss of $50,000. The total expected dollar losses - This refers to the total dollar amount of losses for all occurrence during a specific time period. For example, the organization identified 3 risk items with known loss frequency and severity, the total expected dollar losses will be a sum of the dollar loss form all 3 risk items. Timing - This refers to when does the loss occurs and when the loss payments are made. For example, an employee was injured in the workplace at the beginning of the year while the insurance claim was submitted 2 months afterwards, thus, these 2 months gap is critical for the organization to take decisions. 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 of Each Address negative risk such as hazard risk along with some operational risk Address all four quadrants of risk-strategic, financial, operational and hazard risk ERM looks into a broader types of risks not only negative but positive risk that would bring opportunities. Typically focuses on the risks of specific departments within the organization. Risks are managed in silos, and there may be limited coordination between different business areas. Takes a holistic approach, considering risks across the entire organization. When onboarding new vendors, ERM will consider the risks across the entire organization (TPRM; legal and compliance; business etc.) instead of single department like business. Communication and reporting of risks are usually confined to specific departments or projects. Involves comprehensive communication and reporting mechanisms that provide a top-level view of risks to key stakeholders, including executives and the board. ERM communicates the risk policy to the entire organization, thus, all the departments must follow the policy. Question 4 (10 marks) 6

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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: The probability = 1 in every 40 = 1/40= 0.025 = 2.5% ii. A slip and fall on the floor where an employee is unhurt Answer: The probability = 1/40 *3/4 = 0.025*0.75 = 0.01875 = 1.875% iii. A slip and fall on the floor where an employee is injured but not killed. Answer: The probability = 1/40*1/4*8/10 = 0.025*0.25*0.8 = 0.005 = 0.5% 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 Revenue generated by new machine = $3,000 Additional Cost Saving from new machine = $1,000 Therefore, Additional Cash Flow before Tax = $4,000 7

Annual Depreciation = $154,00/7 = 2,200 Additional Cash Flow before Tax = $4,000 Less Annual Depreciation = $2,200 Taxable Income = $1,800 Less Taxes =$1,800 * 50% = $900 Additional Cash Flow after Tax = $900 Net Cash Flow after Tax = $4,000 - $900 = $3,100 Therefore, PV of Net Cash Flow after Tax = $3,100*4.288 = $13,292.80 Cost of new machine = $15,400 Therefore, Net present value = $13,292.80 - $15,400 = - $2,107.20, the new machine will not have 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 0.15 5,000 0.10 8,000 0.5 10,000 Answer: Expected additional revenues from the new machine are: Probability Additional Revenue Expected Additional Revenue 0.10 2,000 200 0.20 3,000 600 0.40 3,600 1,440 0.15 5,000 750 0.10 8,000 800 0.05 10,000 500 Total 4,290 Additional Revenue generated by new machine = $4,290 8

Additional Cost Saving from new machine = $1,000 Therefore, Additional Cash Flow before Tax = $5,290 Annual Depreciation = $154,00/7 = 2,200 Additional Cash Flow before Tax = $5,290 Less Annual Depreciation = $2,200 Taxable Income = $3,090 Less Taxes =$3,090 * 50% = $1,545 Additional Cash Flow after Tax = $1,545 Net Cash Flow after Tax = $5,290 - $1,545 = $3,745 Therefore, PV of Net Cash Flow after Tax = $3,745*4.288 = $16,058.56 Cost of new machine = $15,400 Therefore, Net present value = $16,058.56 - $15,400 = $658.56, the new machine will have positive net present value of $658.56, thus, 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 . Answer: The present value of the actual stream for each year is: Year Cash Flows Discounted Factor @ 10% Present Value of Cash Flows 1 8,000 0.90909 7,272.73 2 7,000 0.82645 5,785.12 3 6,000 0.75131 4,507.89 4 5,000 0.68301 3,415.07 5 4,000 0.62092 2,483.69 Total $23,464.49 9

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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: Total cost of the new graders = $4,000 * 10 = $40,000 Annual Depreciation = $40,000 / 7 = $5,714.28 Assuming there is no tax PV Net Cash flow after tax = Total cost of the new graders / the present value factor = $40,000 / 4.039 = $9,903 Minimum after tax cash flow = $9,903 - $5,714.28 = $4,189 Therefore, the new graders need to generate at least $4,189 to satisfy the rate of return 16%. 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 and 10.14 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: 10

The present value of $100 in 24 months from now at 8% = $100 * DF@8% in year 2 = $100 *0.857339 = $85.73 b. The present value of $60 to be received at the end of each of the next (7) seven years. Answer: Present value of $60 to be received at the end of each of the next (7) seven years. = $60 * 5.21 = $312.60 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: Year Cash Flow Discounted Factor @ 8% PV Cash Flow 1 $50 0.9259 $46.2950 2 $38 0,8573 $32.5774 3 0 0 4 0 0 5 $100 0.6805 $68.05 Total $146.9224 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 11

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 Predicted Yes and Actual Yes = 280 b. the True Negatives Predicted No and Actual No = 17,800 c. the False Positives Predicted Yes and Actual No = 64 d. the False Negatives Predicted No and Actual Yes = 36 2. Calculate the Accuracy Answer: Accuracy Score = (True Positives + True Negatives) / (True Positives + True Negatives + False Positives + False Negatives) = (280 + 17,800) / (280 + 17,800 + 64 + 36) = 18,080 / 18,180 = 0.9945 = 99.45% 3. Calculate the Precision Answer: Precision = True Positives / (True Positives + False Positives) = 280 / (280 + 64) = 0.8140 = 81.40% 12

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4. Calculate the Recall Answer: Recall = True Positives / (True Positives + False Nagative) = 280 / (280 + 36) = 0.8861 or 88.61% 5. Calculate the F-score Answer: F-Score = 2 * True Positives / (2 * True Positives + False Positives + False Negatives) = 2 * 280 / (2 * 280 + 64 + 36) = 560 / 660 = 0.8484 or 84.84% Final Submission: Submit in Word or PDF (do not use “Pages”) 13

Annie CRM Assignment

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