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RSK4803 Assignment 01 Feedback

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ASSIGNMENT 01 TOTAL [100 MARKS] The assignment consisted of 6 questions. Students were alerted that they will be penalised if not all the questions were answered. We have decided that a penalty of ... 2 marks (+ 5 %) per question will be appropriate. Mark allocation will thus be as follows: Student achieved 100% for the marked questions, but did not answer questions 4 and 6. The student will thus be penalised with 4 marks, which will be subtracted from the overall mark, and a maximum of + 90% will be allocated for the assignment. 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) Suggested solution QUESTION 1.1. COST OF RISK CONCEPT The cost of risk concept was developed as a measure to report results of the risk and insurance management function. The components of the cost of risk consist of: - Insurance cost - Unreimbursed losses - Risk control and loss prevention expenditure - Administration cost Objectives in minimising the cost of risk To minimise the cost of risk, the following should be considered: - Adoption of a long term view of when cost to benefit trade off related to the levels of risk control expenditure - Risk control should be undertaken within the limits dictated by broad corporate financing objectives and constraints - Risk financing decisions should be taken with due reference to the investment decision QUESTION 1.2. COMPONENTS OF THE COST OF RISK Insurance costs Direct insurance costs – directly related to the total of all insurance premiums. • Other aspects must be taken into account to determine the actual cost of insurance. These include opportunity cost of the funds expended as insurance premiums. The tax implications of premiums and claims, and the cost of capital relative to the value of the expected claims. • Costs of statutory insurance – e.g. Worker’s compensation and unemployment insurance but reduce the cost by claims recoveries. ................................................................................continued................................................................................... [Show More]

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