INSURANCE

Q1

a) Five distinguishing features of insurance contracts

Insurance contracts are similar to most other legal contracts; however, certain features of

insurance contracts differentiate them from most other legal contracts. An insurance contract is:

i. Aleatory The performance of one or both parties is contingent on the occurrence of an

event that may never materialize. A homeowners insurance contract promises to pay if

there is damage by fire, for instance; the insurance carrier doesnt have to do anything

unless the damage occurs.

ii. A contract of Adhesion Involves an unequal bargaining position. The insurance

contract is offered to the insured on an as is, take it or leave it basis. The insured

cannot negotiate the policy terms, they are written solely by the insurer. This insurance

contract feature is why coverage is interpreted in its broadest sense and exclusions are to

be narrowly applied. Any ambiguity is found in favor of the insured.

iii. Unilateral The promise of one party (the insurer) is given in exchange for the act of

another party (the insured). The insured pays the premium and the insurance carrier

promises to pay if a covered loss occurs (see Aleatory). If nothing happens, nothing is

required of the insurance carrier only one party (the insured) did anything (paid the

premium).

iv. One of Utmost Good Faith (Uberrima Fides) Both parties to the insurance contract

almost totally rely on the honesty of the other party. The insurer relies on the honesty of

the insured in providing underwriting information; the insured relies on the honesty of the

insurer that they will pay when a covered loss occurs.

v. Conditional Before the insurance contract is activated, certain conditions must be met.

There are two types of conditions: 1) conditions precedent; and 2) conditions subsequent.

A condition precedent is a condition that must be fulfilled to activate the contract. In an

insurance contract, the conditions precedent are the payment of the premium and a

covered loss. Conditions subsequent are acts or duties that must be adhered to in order to

receive the benefits of the policy. An example of conditions subsequent is the Duties

After a Loss section of the policy. To receive the benefits of the policy, the insured must

comply with the contractual requirements.

Q1

b) Steps in risk management process

Step 1: Define the risk context

Identify where or under what circumstances the risk occurs. For example: a particular work site,

department, work section, retail shop branch, or after severe weather.

Step 2: Risk identification

Identify risks that are likely to affect the achievement of your business goals.

Describe the risk.

What can happen?

Consider how and why it can happen.

Describe the consequences of the risk what happens if the risk eventuates?

Systematically work through each function, activity or stage of your operations and identify what

might happen for each function.

Conduct a review of your records and reports to identify things that have gone wrong in the past.

Analyse your systems and processes to identify critical points.

Brainstorm with your employees or co-workers.

Step 3: Risk assessment

This step involves analysing the likelihood and consequences of each identified risk using the

measures provided.

Look at the existing controls for each risk.

Identify what your business does to control this risk.

Rate the effectiveness of existing controls in preventing the risk from eventuating or minimising

its impact should it occur. Indicate whether existing controls are: adequate, moderate or

inadequate.

Likelihood is a qualitative description of probability and frequency

What is the likelihood of the risk occurring?

In the risk analysis matrix select the description that best describes the likelihood of the risk

occurring (with existing control measures in place).

Consequence is the outcome of an event or situation, being a loss, injury, disadvantage or gain

What is the consequence of the risk event?

In the risk analysis matrix select the description that best describes the consequences of the risk

(with existing control measures in place).

Risk Rating = Consequence Rating x Likelihood Rating

On the risk analysis matrix find the intersection of the likelihood and consequence ratings

selected for the risk.

Risk Priority provides an indication of how soon you need to implement a strategy to treat the

risk

Step 4: Risk strategies

The objective of this stage is to develop cost effective options for treating each risk. Determine

the best treatment option from the five methods below.

Eliminate the risk by discontinuing the activity or removing the hazard such as not undertaking

the activity that is likely to trigger the risk.

Consider the following factors when determining the validity of this option to avoid the risk:

- What will happen if the activity is not undertaken?

- Is the risk level too high to proceed or continue with the activity?

- Is the cost of the required controls higher than the benefit of the activity?

- Will the failure of the activity have critical consequences for other areas of your

business?

- Consider the reasons for avoiding the risk. Is your business unnecessarily risk averse?

- Will the risk avoidance increase the significance of other risks or lead to the loss of

opportunities for gain?

Accept the risk and simply take the chance to incur the negative impact

You may already be doing all reasonable things to reduce the risk but it cant be completely

eliminated.

Reduce the likelihood of the risk occurring in order to reduce the negative outcomes

Can the likelihood of the risk occurring be reduced? Through preventative maintenance, or

quality assurance and management, change in business systems and processes.

Reduce the consequences in the event that the risk occurs

Can the impact of the consequences be controlled or reduced if the risk occurs? Through:

contingency planning

minimising exposure to sources of risk or separation or relocation of a business activity and

resources.

Transfer the risk totally, or in part, may be achieved by moving the responsibility to another

party or sharing the risk through a contract, insurance arrangements, or partnership/s and joint

ventures.

Step 5: Monitoring and review

Risk management is an ongoing process. Even if the existing control measures are adequate you

need to regularly review whether anything has changed which may impact on the risk issues you

have identified.

Once the proposed controls are completed reassess the risk by conducting regular risk reviews

and reviewing the progress and effectiveness of your selected risk strategies.

c)

i) Governance risk

Increasingly, businesses are turning to good governance to reap the wider benefits that it brings.

governance to become more efficient and effective in managing their business opportunities and

risks. The impetus for change in this area has traditionally been incidents such as high-profile

non-compliance or evolving legal requirements. Should businesses neglect to pay attention to

these, the consequences can affect corporate and personal reputations, lead to fines and cause

loss of revenue and this is basically governance risk exposure.

ii) Morale hazard:

An attitude that increases the probability of loss from a peril. In insurance context, the attitude of

insured; Attitude of insured to think Its insured so why should I worry about safety of my

house/property/own health. If anything goes wrong, insurer is there to indemnify me. So, Why

should I worry about safety? is an example of a morale hazard. Insured with this kind of attitude

tend to act carelessly. Insurance companies often try to stem the problem of morale hazard by

risk reduction measures, such as insisting on the ownership of fire extinguishers (in the case of

fire insurance), or offering price reductions (for example, if a burglar alarm is installed in a

home). Refers to individuals Carelessness Example Rash driving after getting auto insurance

or keeping doors open after purchasing a insurance for house.

iii) Risk Management

It is an organised programme in which sources and volumes of risk are tracked and procedures

are in place to track and report on the risk.

Important features of risk management include risk limits and risk management policies

established by the Board of Directors, regular reporting of risk at the appropriate level in the

company and are seen by risk officers who are independent of business unit heads Risk

management in the insurance industry refers to managing the risks that are quantifiable and

measurable. Insurance companies manage these risks by; -

(i) Diversification by country, currency, industry. Classes, assets

(ii) Reinsurance

(iii) Matching and hedging of assets

(iv) Good management information system and

(v) Internal control mechanism.

Risk management can be viewed as the first line of defence in a company or a way to prevent the

consequence of situation that could imperil the company. Capital supplements risk management;

capital is required to support the financial costs to the company of situations where risk

iv) Uncertainity:

Issues that occurs when we have no idea of what the possible outcome might be. The probability

distribution is unknown (or so extremely large as to functionally be the same as unknown).

We dont know what is going to happen next, and we do not know what the possible distribution

looks like.

In other words, his view is that the future is always unknown, but that does not make it

uncertain. Rather, he takes the analysis a step further, quantifying this in the language of

statistical probability.

Uncertainty is when you dont know the probabilities. John Maynard Keynes used the example

of a company considering an investment in a copper smelter which could last years and years.

The company has no good idea what the price of copper will be in 20 years, nor is it certain what

is the probability of different possible prices.

d) Five information gathering techniques

Information gathering includes various techniques like brainstorming, Delphi technique,

interviews and root cause analysis. The ultimate aim of all these techniques is to identify and

prepare a comprehensive list of risks in the project and assessments

Brainstorming

It is one of the most widely used techniques to identify risks in a project. Project team usually

performs brainstorming, often with subject matter experts, risk management experts and other

important stakeholders who can contribute to the risk identification. It allows people to come up

with risks. During brainstorming sessions there should be no criticism of ideas. The main focus

is to open up possibilities of risk. Judgments and analysis at this stage inhibit idea generation.

Ideas should only be evaluated at the end of the brainstorming session. Brainstorming sessions

always have a facilitator to lead the team and help turn their ideas into a list of risks

Delphi technique

This technique is used to build consensus of experts who participate anonymously. A facilitator

uses a questionnaire to solicit ideas about important project risks. The questionnaire is often

designed with forced choices that require the experts to select between various options. The

responses are summarized and re-circulated to the experts for further review until consensus on

the final list of risks is reached. Delphi technique helps reduce bias in the data and keeps any one

person from having undue influence on the outcome.

Interviewing

Interviewing is generally a face-to-face meeting that includes question and answer sessions. The

interviews are conducted with project manager, project team, stakeholders, subject-matter

experts, and individuals who may have participated in similar, past projects. Interviews help us

to get first-hand information about others' experience and knowledge.

Root cause analysis

Root cause identification is a technique for identifying essential causes of risk. Reorganizing the

identified risks by their root causes will help to identify more risks. This technique enables you

to understand the risk more clearly so that responses can be planned to prevent recurrences.

Joint application development (JAD)

JAD sessions are similar to general facilitated sessions. However, the group typically stays in the

session until the session objectives are completed. For a requirements JAD session, the

participants stay in session until a complete set of requirements is documented and agreed to.

Prototyping

Prototyping is a relatively modern technique for gathering requirements. In this approach, you

gather preliminary requirements that you use to build an initial version of the solution -- a

prototype. You show this to the client, who then gives you additional requirements. You change

the application and cycle around with the client again. This repetitive process continues until the

product meets the critical mass of business needs or for an agreed number of iterations.

Q2

a) Major loss exposures in the study of insurance and risk management

1. Personal Loss ExposuresPersonal Pure Risk

Because the financial consequences of all risk exposures are ultimately borne by people (as

individuals, stakeholders in corporations, or as taxpayers), it could be said that all exposures are

personal. Some risks, however, have a more direct impact on peoples individual lives. Exposure

to premature death, sickness, disability, unemployment, and dependent old age are examples of

personal loss exposures when considered at the individual/personal level. An organization may

also experience loss from these events when such events affect employees. For example, social

support programs and employer-sponsored health or pension plan costs can be affected by

natural or man-made changes. The categorization is often a matter of perspective. These events

may be catastrophic or accidental.

2. Property Loss ExposuresProperty Pure Risk

Property owners face the possibility of both direct and indirect (consequential) losses. If a car is

damaged in a collision, the direct loss is the cost of repairs. If a firm experiences a fire in the

warehouse, the direct cost is the cost of rebuilding and replacing inventory. Consequential or

indirect losses are nonphysical losses such as loss of business. For example, a firm losing its

clients because of street closure would be a consequential loss. Such losses include the time and

effort required to arrange for repairs, the loss of use of the car or warehouse while repairs are

being made, and the additional cost of replacement facilities or lost productivity. Property loss

exposures are associated with both real property such as buildings and personal property such as

automobiles and the contents of a building. A property is exposed to losses because of accidents

or catastrophes such as floods or hurricanes.

3. Liability Loss ExposuresLiability Pure Risk

The legal system is designed to mitigate risks and is not intended to create new risks. However, it

has the power of transferring the risk from your shoulders to mine. Under most legal systems, a

party can be held responsible for the financial consequences of causing damage to others. One is

exposed to the possibility of liability loss (loss caused by a third party who is considered at fault)

by having to defend against a lawsuit when he or she has in some way hurt other people. The

responsible party may become legally obligated to pay for injury to persons or damage to

property. Liability risk may occur because of catastrophic loss exposure or because of accidental

loss exposure. Product liability is an illustrative example: a firm is responsible for compensating

persons injured by supplying a defective product, which causes damage to an individual or

another firm.

4. Catastrophic Loss Exposure and Fundamental or Systemic Pure Risk

Catastrophic risk is a concentration of strong, positively correlated risk exposures, such as many

homes in the same location. A loss that is catastrophic and includes a large number of exposures

in a single location is considered a nonaccidental risk. All homes in the path will be damaged or

destroyed when a flood occurs. As such the flood impacts a large number of exposures, and as

such, all these exposures are subject to what is called a fundamental risk. Generally these types

of risks are too pervasive to be undertaken by insurers and affect the whole economy as opposed

to accidental risk for an individual. Too many people or properties may be hurt or damaged in

one location at once (and the insurer needs to worry about its own solvency). Hurricanes in

Florida and the southern and eastern shores of the United States, floods in the Midwestern states,

earthquakes in the western states, and terrorism attacks are the types of loss exposures that are

associated with fundamental risk. Fundamental risks are generally systemic and nondiversifiable.

5. Accidental Loss Exposure and Particular Pure Risk

Many pure risks arise due to accidental causes of loss, not due to man-made or intentional ones

(such as making a bad investment). As opposed to fundamental losses, noncatastrophic

accidental losses, such as those caused by fires, are considered particular risks. Often, when the

potential losses are reasonably bounded, a risk-transfer mechanism, such as insurance, can be

used to handle the financial consequences.

In summary, exposures are units that are exposed to possible losses. They can be people,

businesses, properties, and nations that are at risk of experiencing losses. The term exposures

is used to include all units subject to some potential loss.

b) Five main methods of handling risks

Because risk is the possibility of a loss, people, organizations, and society usually try to avoid

risk, or, if not avoidable, then to manage it somehow. There are 5 major methods of handling

risk:

- avoidance,

- loss control,

- retention,

- noninsurance transfers,

- insurance.

Avoidance is the elimination of risk. You can avoid the risk of a loss in the stock market by not

buying or shorting stocks; the risk of a venereal disease can be avoided by not having sex, or the

risk of divorce, by not marrying; the risk of having car trouble, by not having a car. Many

manufacturers avoid legal risk by not manufacturing particular products.

Of course, not all risks can be avoided. Notable in this category is the risk of death. But even

where it can be avoided, it is often not desirable. By avoiding risk, you may be avoiding many

pleasures of life, or the potential profits that result from taking risks. Those who minimize risks

by avoiding activities are usually bored with their life and don't make much money. Virtually

any activity involves some risk. Where avoidance is not possible or desirable, loss control is the

next best thing.

Loss control can either be effected through loss prevention, which is reducing the probability of

risk, or loss reduction, which minimizes the loss.

Loss prevention requires identifying the factors that increase the likelihood of a loss, then either

eliminating the factors or minimizing their effect. For instance, speeding and driving drunk

greatly increase auto accidents. Not driving after drinking alcohol is a method of loss prevention

that reduces the probability of an accident. Driving slower is an example of both loss prevention

and loss reduction, since it both reduces the probability of an accident and, if an accident does

occur, it reduces the magnitude of the losses, since accidents at slower speeds generally cause

less damage.

Most businesses actively control losses because it is a cost-effective way to prevent losses from

accidents and damage to property, and generally becomes more effective the longer the business

has been operating, since it can learn from its mistakes.

Risk retention, (aka active retention, risk assumption), is handling the unavoidable or unavoided

risk internally, either because insurance cannot be purchased or it is too expensive for the risk, or

because it is much more cost-effective to handle the risk internally. Usually, retained risks occur

with greater frequency, but have a lower severity. An insurance deductible is a common example

of risk retention to save money, since a deductible is a limited risk that can save money on

insurance premiums for larger risks. Businesses actively retain many risks what is commonly

called self-insurance because of the cost or unavailability of commercial insurance.

Passive risk retention is retaining risk because the risk is unknown or because the risk taker

either does not know the risk or considers it a lesser risk than it actually is. For instance, smoking

cigarettes can be considered a form of passive risk retention, since many people smoke without

knowing the many risks of disease, and, of the risks they do know, they don't think it will happen

to them. Another example is speeding. Many people think they can handle speed, and that,

therefore, there is no risk. However, there is always greater risk to speeding, since it always takes

longer to stop or change direction, and, in a collision, higher speeds will always result in more

damage or risk of serious injury or death, because higher speeds have greater kinetic energy that

will be transferred in a collision as damage or injury. Since no driver can possibly foresee every

possible event, there will be events that will happen that will be much easier to handle at slower

speeds than at higher speeds. For instance, if someone fails to stop at an intersection just as you

are driving through, then, at slower speeds, there is obviously a greater chance of avoiding a

collision, or, if there is a collision, there will be less damage or injury than would result from a

higher speed collision. Hence, speeding is a form of passive risk retention.

Risk can also be managed by noninsurance transfers of risk. The 3 major forms of noninsurance

risk transfer is by contract, hedging, and, for business risks, by incorporating. A common way to

transfer risk by contract is by purchasing the warranty extension that many retailers sell for the

items that they sell. The warranty itself transfers the risk of manufacturing defects from the buyer

to the manufacturer. Transfers of risk through contract is often accomplished or prevented by a

hold-harmless clause, which may limit liability for the party to which the clause applies.

Hedging is a method of reducing portfolio risk or some business risks involving future

transactions. Thus, the possible decline of a stock price can be hedged by buying a put for the

stock. A business can hedge a foreign exchange transaction by purchasing a forward contract that

guarantees the exchange rate for a future date.

Investors can reduce their liability risk in a business by forming a corporation, an S corporation,

or a limited liability company. This prevents the extension of the company's liabilities to its

investors.

Insurance is another major method that most people, businesses, and other organizations can use

to transfer pure risks, by paying a premium to an insurance company in exchange for a payment

of a possible large loss. By using the law of large numbers, an insurance company can estimate

fairly reliably the amount of loss for a given number of customers within a specific time. An

insurance company can pay for losses because it pools and invests the premiums of many

subscribers to pay the few who will have significant losses. Not every pure risk is insurable by

private insurance companies. Events which are unpredictable and that could cause extensive

damage, such as earthquakes, are not insured by private insurers, although reinsurers may cover

these types of risks by relying on statistical models to estimate the probabilities of disaster.

Speculative risks risks taken in the hope of making a profit are also not insurable, since

these risks are taken voluntarily, and, hence, are not pure risks.

Q3

a) Five assignments or responsibilities of a risk manager

Specific tasks depend on the industry in which you are working, how specialised your role is and

the level at which you are working. However, key activities may include:

- planning, designing and implementing an overall risk management process for the

organisation;

- risk assessment, which involves analysing risks as well as identifying, describing and

estimating the risks affecting the business;

- risk evaluation, which involves comparing estimated risks with criteria established by

the organisation such as costs, legal requirements and environmental factors, and

evaluating the organisation's previous handling of risks;

- establishing and quantifying the organisation's 'risk appetite', i.e. the level of risk they

are prepared to accept;

- risk reporting in an appropriate way for different audiences, for example, to the board of

directors so they understand the most significant risks, to business heads to ensure they

are aware of risks relevant to their parts of the business and to individuals to understand

their accountability for individual risks;

- corporate governance involving external risk reporting to stakeholders;

- carrying out processes such as purchasing insurance, implementing health and safety

measures and making business continuity plans to limit risks and prepare for if things go

wrong;

- conducting audits of policy and compliance to standards, including liaison with internal

and external auditors;

- providing support, education and training to staff to build risk awareness within the

organisation.

b) Role of government in risk managment

Legislation

A government manages and controls the risks in different sector through legislation. The type

and degree of legislation obviously have a direct and significant impact on the sector as a whole,

and on the individual enterprise and individuals, and therefore constitute risks to all of them.

Legislation is sub-divided into two areas, namely legislation dealing with resource utilization and

resource management, and legislation dealing with firm management;

(i) For effective and economic resource utilization and management, the government has to be

aware of the needs of a sector and all rights of access and protection. The government has also to

be aware of the needs of other competing sectors and individuals

(ii) The majority of national, state, and local legislation concerns firm management. This is in the

form of regulations and bye-laws directly concerning firm operations and production practices,

and then indirectly concerning the manufacturing industries, suppliers, services, and marketing

activities.

Production of Information

All governments accept the responsibility of providing information services to different sectors,

particularly national statistics and data relevant to economic and development planning. For the

development of a new sector, many governments accept the responsibility for additional

information services, such as the adoption non risk engagement practices

Standards and codes of practice

Standards and codes of practice for the industry are invaluable, not only to the economic strength

of the industry as a whole, but also to citizenry and other industry players to reduce their

individual risks. Meeting the standards will eliminate most of the risks currently associated with

the "grey" areas of quality control, where the products are rejected because there is no clean

division between acceptability and unacceptability.

Research information

Most governments support industrial-related research, either at government research centres or

through contract research to the private sector. Although the topics of research clearly have some

relevance to the industry, most governments do not specify research programmes within their

policy which directly support the core of the industry, namely the producers. The majority of

support is for scientists and technologists at universities and research centres who identify their

own research objectives.

Arbitration

The government acts as an arbiter incase of risk occurance by provision of level play grounds for

conflict resolutions especially legal through the judicial systems

Regulations

Provision of regulations especially for business risk e.g. exchange rate regulations and price

regulation mechanisms to carte for risks aring from international trade and arbitrary market price

changes.

Q4

a) challenges ffacing the insurance industry in kenye today and suggested solutions

Challenges

a) Some cultural practices and beliefs which are not in tune with the current economic

realities.

b) Poor economic growth.This has led to high poverty levels hence low purchasing power.

c) Lack of knowledge and appreciation of the role of insurance by the public.

d) Ignorance. Many people don't think insurance is beneficial to them.

e) Negative image of the industry caused by unethical practices by some agents and other

market players.

Suggested solutions

1. Develop Insurance sector image management strategy.

2. Improve IFIU visibility and companies to set clear fraud detection

3. strategies.

4. Set intermediary development strategy and enhance brokers disclosure requirements.

5. Deepen insurance consumer awareness and education measures.

6. Encourage more Innovativeness in product development and marketing.

7. Consolidate regulations, encourage compliance and enhance

8. enforcement

9. Research on the strategic industry issues pointed out such as:

i. Price undercutting;,

ii. Fraud in motor and medical classes;

iii. The role of insurance in employment and investment;

iv. Optimal asset mix and investment portfolio;

v. Principal-Agent problem from a microeconomic perspective;

vi. Optimal market competition and industry size for stability;,

vii. Intermediaries development, empowerment and disclosure;

viii. Insurance inclusion across the 47 counties;

ix. Determinants of insurance uptake in Kenya

b) To differenciate ;

1) Peril and Hazard

These two items are one of the many aspect of risk and it relates to the cause of losses:

A peril can be defined as that which gives rise to a loss.

A hazard can be defined as that which influences the operation of the peril.

At first, the distinction between the two may not be that obvious. However, the following

example should help.

Consider a thatched cottage which is insured by a specialist thatch insurance underwriter as most

standard home insurers will not offer cover for properties that are build of a standard

construction. This risk of fire is one of the components that are insured under this policy. Fire is

the prime cause that will give rise to a loss, but the thatched roof makes the fire spread more

quickly and do more damage, if a fire does occur. Fire is, therefore, the peril and the thatched

roof is the hazard.

Hazards are classified as physical or moral. Physical hazard relates to the dimensions and

physical characteristics of the risk. For example, the better the standard of building construction

the lower the physical hazard for fire and similar risks, as the building will be more resistant to

damage. Buildings used as warehouses that are constructed entirely of metal, concrete and other

non-combustible materials will constitute a low fire risk to the warehouse insurance underwriter.

Moral hazard arises from the attitude and conduct of people. In insurance, this is usually the

conduct of the person insured. However, the conduct of the insureds employees and that of

society as a whole are also aspects of moral hazard.

Sometimes it can be difficult to distinguish between physical and moral hazard. Take the

example of the high value sports car. If you are an insurer who is insuring the driver against the

risk of injuring someone, the car itself is not a moral hazard; the manner in which it may be

driven is the moral hazard.

2) Financial risk and operational risk

Operational Risk

Operational risk rises from your company's internal decision-making and practices. Even if your

business idea is sound and you have a solid customer base, an operational risk can sink your

business. For example, if your company doesn't have good Internet security and your customers'

personal information is exposed, you'll have to deal with damage to your company's reputation

and the cost of the fallout. Other operational risks include holes in your supply chain, poor

performances from vital employees and weak quality control, which may lead to inferior

products and services.

Business Risk

Business risk covers all the risks associated with your company's services, products and strategic

decisions. Deciding to enter a new service or product into your market is a business risk, because

you don't know how or if customers will respond. If your company enters into a business

partnership with another company, you're taking on a business risk, because the partnership has

the potential to hurt your business if it goes poorly. A rise in the cost of materials necessary for

your product and other unforeseen business events that impact your manufacturing or sales also

constitute business risks.

Q5

a) Strategic risks that a business can be exposed to

Answer One

A business is not an island, so it cant operate without electricity, natural gas, roads, and other

forms of public infrastructure. From making and transporting goods to bringing customers to the

shop, businesses have Strategic Dependencies on these assets.

And since there are forces that can interrupt these assets (entities the business does not directly

own or invest in), a Strategic Risk is created.

Businesses also depend on markets, to compete, reach customers and determine the value of

goods. But markets can be fickle, sensitive and volatile, operating within a complex web of

deterministic forces whose weight of influence on the overall market is constantly changing.

Businesses attempt to time their investments to maximize their market share while minimizing

the risks associated with market volatility. But as we know, dependencies plus volatile forces

within the market equal Strategic Risk.

Answer Two

Strategic risks are those that arise from the fundamental decisions that directors take concerning

an organisations objectives. Essentially, strategic risks are the risks of failing to achieve these

business objectives. A useful subdivision of strategic risks is:

Business risks risks that derive from the decisions that the board takes about the products or

services that the organization supplies. They include risks associated with developing and

marketing those products or services, economic risks affecting product sales and costs, and risks

arising from changes in the technological environment which impact on sales and production.

Non-business risks risks that do not derive from the products or services supplied. For

example, risks associated with the long-term sources of finance used. Strategic risk levels link in

with how the whole organisation is positioned in relation to its environment and are not affected

solely by what the directors decide. Competitor actions will affect risk levels in product markets,

and technological developments may mean that production processes, or products, quickly

become out-of-date

b) Benefits of insurance to an organization

The contributions of insurance to business community and human life are the significant.

Importance of insurance can be understand by the following facts.

1. Reasonable profit

The businessmen can earn a reasonable profit for their businesses. The insurance can help them to

earn the same rate of profit if their business fails to generate income.

2. Sense of security

There are many chances of losses in a business. But due to insurance, the risk of losses is

transferred to insurance company and it gives the sense of security to businessman.

3. Employment increase

The insurance companies provided the jobs to thousands of people. In this way the problem of

unemployment is reduced.

4. Protection of property

Due to insurance the personal and business property is protected from natural losses such as

accident, fire, etc.

5. Solve the social problem

Insurance is useful device for solving the social problems. In cash of death provides finance to his

family compensation is available to overcome the industrial injuries and road accident.

6. Favourable balance of payment

The insurance of business is an invisible export and it provides sufficient contribution toward the

balance of payment

7. Equitable premium

The large policy holders provide large funds and small policy holders pay less money in common

funds. In the way the amount of premium becomes equitable.

8. Research facilities

The insurance companies can conduct research about the rate of accidents, death and losses faced

by business units.