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RSK4803 ASSIGNMENT 01 ASSIGNMENT 01 TOTAL [100 MARKS] Purpose The purpose of this assignment is to assess your knowledge and understanding of the theory of the module. Please refer to Sections 1.5, 1.6, 1.7 and 1.8 to ensure that your assignment meet the editorial requirements. Question 1 [15 Marks] Risk financing is an important component of the risk management process. To assist senior management to formulate a risk financing strategy, they need to understand the risk financing alternatives available and the cost of risk. 1.1. Evaluate the cost of risk concept in terms of the components and objectives in minimising the cost of risk. (5 marks) 1.2. Discuss the components of the cost of risk. (10 marks) Question 2 [30 Marks] The financial consequences of risk can be retained or transferred and in many cases, it may be more beneficial for organisations to retain a portion of the risk. 2.1. Distinguish between unfunded and funded risk retention. (10 marks) 2.2. Analyse the steps to implement a retention programme. (10 marks) 2.3. Determine the criteria that can be used to evaluate the quantum of retention funding. (10 marks). Question 3 [10 Marks] Thabo is the CRO of African Sun (Pty) Ltd. As part of the risk retention strategy, Africa Sun invested R60 000 in AXA shares listed on the Johannesburg Stock Exchange (JSE). Since the investment, one rumour has it that the value of the AXA shares will decrease as a result of a planned merger that may be blocked by the Competition Commission. At this stage no confirmation is available as the merger may not be blocked, which may result in African Sun earning the expected ROI of the investment strategy. Open Rubric RSK4803 ASSIGNMENT 01 Thabo contacted the insurance broker of African Sun to obtain insurance against possible losses in the value of the shares. After assessing the situation, the broker declined to insure the risk. Argue the insurance broker's case for declining the insurance proposal. Question 4 [20 Marks] Simphiwe is the CRO of TigerRE Ltd, a reinsurer registered in South Africa. TigerRE has an underwriting exposure of R350m to a motor insurance pool and R200m to a commercial insurance pool. An investment banker from CIB Bank indicated that TigerRE will be able to increase their income if they are prepared to securitise a component of their underwriting risk. The investment banker further indicated that there is currently significant capacity for securitisation transactions and that the spread is closely correlated with the R186. When Simphiwe discussed the idea in the Asset and Liability Committee (ALCO), the Chair instructed him to explain the concept of securitisation to the members in the next Board Risk Committee. Illustrate the securitisation structure of the motor insurance pool by means of a diagram and explain the role of each participant in the structure. You can make the following assumptions: The motor pool is divided 40/60 between Insurer A and Insurer B. TigerRE will be able to securitise their underwriting risk successfully. Question 5 [10 Marks] To successfully establish a risk management culture, having a common risk language is a fundamental contributing factor. It however appears that industries and organisations have different classifications for risks, which makes it difficult to compare risks across industries and organisations. There are a number of frameworks and classifications available. Compare the risk classification (risk types) of the Basel framework for banks and the Solvency II framework for (re) insurers. RSK4803 ASSIGNMENT 01 Question 6 [15 Marks] TARGET CASH AND CARRY (PTY) LTD (TARGET) Target is a food, general and household goods retailer located in Eldoraigne, Centurion and has been in operation for 15 years. The business Target sells food, general and household goods and also operates a bakery and butchery in the shop. A small section of the premises is sub-let to a lock and key business. The financial manager indicated that Target is expecting annual growth of 8% per annum from 2017 after the upgrade of the kitchen and butchery. Target has a long-term lease agreement for the premises, which will expire at the end of 2030. The outlay of the shop can be compared with its competitors i.e. Spar, Checkers and Pick n Pay. Concerns and current insurance policy The store experienced significant business interruption events recently and approached the insurance broker to advice on updating the business interruption section of an existing policy. The CRO insisted on having the policy updated early in the new financial year, which will be on 1 January 2017. The MPL (Maximum Potential Loss) is assessed as the total loss resulting from a potential fire that destroys the entire premises/business. The renewal date of the insurance policy coincides with the financial year. The Plant, Machinery, Stock and Contents are insured under a Fire Section, and the Business Interruption section follows the Fire section. Reinstatement can take up to 12 months, with business normalisation potentially another 6 months, so one should consider at least an 18 month indemnity period. Question Calculate the total estimated business interruption coverage amount based on the financial statements below. Show all your calculations. Audited financial statements The financial statements are presented below TARGET CASH AND CARRY (PTY) LTD STATEMENT OF FINANCIAL POSITION AS AT Assets Non-Current Assets Properly, plant and equipment Loans to directors Deferred tax 2016/12/31 Note(s) 2015/12/31 2016/12/31 1 R 1 640 944 R 2 105 277 R 1 772 712 R 4 161 390 R 642 R 5 934 744 R 3 746 221 Current Assets Inventories Trade and other receivables Current tax receivable Cash and cash equivalents Total Assets Equity and Liabilities Share capital and reserves Share capital Retained Income Liabilities Non-Current Liabilities Other financial liabilities Deferred tax Current Liabilities Trade and other payables Other financial liabilities Bank overdraft Total Liabilities Total Equity and Liabilities R 3 663 872 R 1 321 089 R 340 R 4 985 301 R 8 731 522 R 3 116 766 R 743 082 R 340 R 33 340 R 3 893 528 R 9 828 272 R 100 R 909 891 R 909 991 R 100 R 916 948 R 917 048 R 1 803 739 R 447 452 R 2 251 191 R 2 541 768 R 417 389 R 2 959 157 R 4 343 289 R 1 010 351 R 206 700 R 5 560 340 R 7 811 531 R 8 721 522 R 5 309 923 R 642 164 R 5 952 087 R 8 911 244 R 9 828 292 STATEMENT OF COMPREHENSIVE INCOME Note(s) Revenue Sale of goods Cost of sales Purchases Gross profit Other Income Rental income Interest received Gains on disposal of assets Operating expenses Accounting fees Advertising Bad debts Bank charges Cleaning Computer expenses Consulting fees Depreciation, amortisation and impairments Donations Employee costs Electricity and water General expenses Insurance Lease rentals on operating lease Legal expenses Levies Motor vehicle expenses Petrol end oil Postage Printing and stationery Repairs and maintenance Royalties and license fees Security Staff welfare Telephone and fax Travel-local Operatlng profit Finance costs Profit before taxation Taxation (Loss) profit for the year Other comprehensive income Total comprehensive (loss) Income for the year 12 MONTHS ENDED 2015/12/31 2016/12/31 R 69 039 371 R 93 823 318 -R 57 740 986 R 11 298 385 -R 81 429 359 R 12 393 959 R 14 010 R 3 767 R 131 042 R 148 819 R 7 089 R 9 756 R 16 845 R 89 867 R 19 587 R 23 497 R 624 043 R 37 894 R 92 354 R 40 250 R 350 564 R 28 399 R 5 167 616 R 1 323 380 R 41 917 R 172 329 R 922 435 R 40 981 R 101 529 R 76 288 R 84 802 R 7 819 R 17 497 R 377 506 R 773 306 R 328 438 R 200 101 R 55 110 R 74 230 R 11 071 739 R 375 465 -R 351 817 R 23 648 -R 30 705 -R 7 057 R 83 448 R 40 017 R 5 206 R 711 698 R 58 141 R 144 195 R 424 349 R 40 130 R 4 869 760 R 1 604 888 R 88 686 R 249 896 R 1 146 742 R 40 250 R 99 564 R 95 607 R 134 097 R 8 756 R 21 581 R 749 631 R 759 294 R 335 008 R 304 771 R 78 844 R 87 391 R 12 181 950 R 228 854 -R 218 319 R 10 535 -R 4 597 R 5 938 -R 7 057 R 5 938 STATEMENTS OF CHANGES IN EQUITY Share capital Balance at 2014/01/01 100 Profit for the year Other comprehensive income Total comprehensive income for the year Balance at 2015/01/01 100 Loss for the year Other comprehensive income Total comprehensive loss for the year Balance at 2016/12/31 100 Retained income Total equity R 911 010 R 5 938 R 911 110 R 5 938 R 5 938 R 916 948 -R 7 057 R 5 938 R 917 048 -R 7 057 -R 7 057 R 909 891 -R 7 057 R 909 991 STATEMENT OF CASH FLOWS Note(s) Cash flows from operating activities Cash receipts from customers Cash pald to suppliers and employees Cash (used in) generated from operations Interest income Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Sale of property, plant and equipment Loans to group cornpanies repaid Sale of financial assets Net cash from investing activities Cash flows from financing activities Net movement on flnancial liabilities Repayment of members loan Finance lease payments Net cash from financing activities Total cash movement for the year Cash at the beginning of the year Total cash at end of the year 12 MONTHS ENDED 2015/12/31 2016/12/31 R 69 183 758 -R 70 674 275 -R 1 490 517 R 3 767 -R 1 486 750 R 94 167 962 -R 93 924 428 R 243 534 9,7513 253,290 1 -R 331 250 -R 192 623 1 R 243 496 -R 87 754 R 795 200 R 1 390 000 R 1 992 577 -R 369 832 R 2 056 113 -R 351 817 R 1 334 464 R 1 204 775 -R 3 940 661 -R 218 319 -R 2 954 205 -R 240 040 R 33 340 -R 206 700 -R 708 338 R 741 678 R 33 340 1. PROPERTY PLANT AND EQUIPMENT COST Leasehold property Plant and machinery Furniture and fixes Motor vehicles R 40 209 R 3 617 666 R 890 701 R 348 524 ACCUMULATED DEPRECIATION -R 2 419 329 -R 520 473 -R 184 586 CARRYING VALUE R 40 209 R 1 198 337 R 370 228 R 163 938 R 1 772 712