C. Essay question (homework) (15 marks)
hazards causing damages to the insured car such as fire, theft, floods etc in addition to third party coverage. However, it is not compulsory by law.
3. Distinguish between compensation under the Employees’ Compensation
Ordinance and the common law? (5 marks)
Employee can get a compensation under the Employees’ Compensation Ordinance if he was injured at work during employment regardless it is his fault or not. However, compensation at common law can only be awarded when the employee can prove that it is the employer’s fault causing the injury.
The compensation under the Employees’ Compensation Ordinance does not preclude employee’s right to take action for common law’s compensation. If the employee can get a claim under the common law, the amount
compensated under the Employees’ Compensation Ordinance should be deducted.
Risk Management Quiz (time allowed: 40 minutes)
Part A: Multiple Choice (10 marks)
1. Michael has just established a fast food shop in Wanchai. He is very concerned about the hazard of fire and is thinking about different possible strategies to deal with it. Which of the following strategy is the least feasible for Michael:
a) Use risk assumption strategy to absorb the loss if fire happens b) Use risk reduction strategy to reduce the opportunities of having fire c) Use fire insurance to cover the possible loss if fire happens
d) Use risk avoidance strategy to find a premise where fire has never happened there Ans: d
2. Which of the following is incorrect:
a) Normally, still a number of pure risks are non-insurable b) Speculative risks are generally non-insurable
c) Pure risks are generally insurable
d) Normally, still a number of speculative risks are insurable Ans: d
3. Which of the following insurance is required by law in Hong Kong a) Fidelity insurance
b) Comprehensive insurance
c) Employees’ compensation insurance d) Public liability insurance
4. Unconscious risk assumption occurs when:
a) The potential risk has not been identified b) The loss cannot be avoided
c) The loss cannot be accurately calculated
d) The potential risk is identified but haven’t been taken care of Ans: a
5. Insurable risk is:
a) A risk that the insurance company would offer cover for the loss b) A risk that should be insured according to law
c) A risk that getting insured is the best way for dealing with it
d) A risk that the concerned company can choose to insure against it or not Ans: a
6. Fidelity insurance is designed to cover:
a) The loss to the company due to the mistakes committed by employees b) The loss to the company due to the dishonest act of employees
c) The loss to the company due to the dishonest act of business partners d) The loss to the company due to the mistakes committed by the owner
7. All risks concerned with a business having risk management are considered to be taken care of because:
a) Any risk not taken care of by other strategies will automatically be picked by the risk avoidance strategy
b) Any risk not taken care of by other strategies will automatically be picked by the risk prevention/reduction strategy
c) Any risk not taken care of by other strategies will automatically be picked by the risk transfer strategy
d) Any risk not taken care of by other strategies will automatically be picked by the risk assumption strategy
8. A TV manufacturing company has sold a TV to its employee. The TV exploded when the employee was watching it at home. The employee was injured and it was found that the reason for the accident was owing to the defect of the TV. Which type of insurance that the company can take out for compensating the employee’s claim?
a) Public liability insurance b) Fidelity insurance
c) Employees’ compensation insurance d) None of above
9. Which of the following is a correct description about risk management strategies:
a) Risk prevention/reduction strategy is to eliminate all chance of loss from happening b) Risk avoidance strategy is to avoid spending too much on managing a risk
c) Risk transfer strategy is to transfer all the risk to its competitors d) Risk assumption is to assume the loss by the company concerned
10. The following are the reasons of having periodic review on the risk management process except:
a) many new risks keep emerging into the market
b) many new insurance products keep being rolled out in the market c) many new safety technologies keep appearing in the market d) many new investors keep injecting cash into the market
(1 mark each, total = 10 marks)
Part B: short questions (30 marks)
1. Outline two major impacts of pure risk on a business before the hazard actually occurs.
(10 marks) Ans:
The two major impacts would be on costs and mental anxiety:
- Premium for insurance costs
- Opportunity costs for reserve funds
- Costs on risk prevention/reduction measure (5 marks) Mental anxiety:
Pure risk always poses as an uncertainty to the business since there are always some sorts of risk overlooked and the company would be exposed to risk unprepared. Of course risk assumption can take care of it but it is surely not desirable. Such anxiety would deter investment or development plans of the business (5 marks)
2. “Since after applying risk reduction strategy, the risk of having hazards will be largely reduced and that the rest of the loss could be absorbed by using risk assumption strategy, leaving risk transfer strategy unnecessary.” Explain with reason two scenarios under which the above statement may not be true (10 marks) Ans:
It may not be true under following situations:
a) The potential loss from some hazards, even after risk reduction, could be still
substantial e.g. public liability. In that case risk assumption alone may not be able to bear the burden and risk transfer is deemed appropriate to cover the loss.
(5 marks) b) Some risks, as required by law, should be protected by insurance e.g. motor
insurance with third party coverage and employees’ compensation. Therefore risk transfer is still inevitable.
3. Describe three ways, each with an example, through which the risk faced by a firm can be transferred to other party. (10 marks)
There are three ways of transferring the risk:
a) Transfer to insurance company through taking out insurance policy e.g. buying a motor insurance with comprehensive coverage to protect against damages to the vehicle arising from many different causes (2 marks) b) Transfer the risk-bearing activity to another party e.g. requiring the supplier holding
the inventory until the last moment upon request by the firm, so that the potential loss associated with inventory holding stays with the supplier. (4 marks) c) Transfer the financial burden to another party through agreement e.g. for industrial
market asking the buyer to bear all the risk once the product has been shipped out.
Part C: Essay question (60 marks) Question 1: (30 marks)
Paul is planning to establish a courier company specializing in delivery documents and small parcels within Hong Kong. In view of the congested traffic in Hong Kong and cost
consideration, Paul decides that all the delivery services will be done through public transportation. Since the delivery service would involve a lot of people who are mostly
working out-door, Paul concerns very much about the risk arising during the delivery process.
He has some knowledge about risk management but concludes that it is not possible to avoid these risks unless he quits the business.
With reference to the different steps of risk management process, advise how Paul can develop an effective risk management strategy for the delivery service.
The risk management process is as follows:
a) Identification of risk: there could be the risk of having the delivery employee getting injured and loss of the document or parcel in the delivery process (5 marks) b) Analysis of the risk: getting injured could happen from time to time though it may not be
very frequent. Yet, the cost of injury could be very high once happen; loss of document or parcel could be more frequent but the value of loss would be difficult to determine
c) Develop alternative strategies: risk avoidance is ruled out in the very beginning but the
other three strategies could be used (3 marks)
d) Selection of appropriate strategies and implementation:
- For injury of employee: risk transfer should be adopted since employees’
compensation insurance is compulsory. However, in order to reduce the cost of insurance and protect the employees, risk reduction strategy should be adopted e.g.
no overloading for delivery people, more training on carrying heavy stuff, better scheduling and routing to avoid heavy traffic
- For loss of documents and parcels: risk reduction can be applied e.g. suitable loading, secure packaging, effective procedure for checking. For the compensation of loss, the company may apply risk transfer by taking insurance or limit the amount of
compensation in the agreement and the rest be borne by risk assumption.
( 12 marks)
e) Evaluation: evaluate the risk management strategies from time to time especially when new scope of business has been added, and the whole process should be reviewed to see if there is any improvement that can be made. (5 marks)
(Total = 30 marks) Question 2: (30 marks)
Agnes is a housewife who is very good at making cakes and many friends keep asking her to set up her cake shop. Finally Agnes made up her mind to establish a cake shop but found it very expensive to rent outlets to sell her cakes. She talked to her son Michael for opinions one day.
Michael said, “Why not sell the cakes online so that people can order them and make payments through internet or smart phone direct. All you need is to keep a kitchen that is just for manufacturing but not opened to customers. Thus you don’t have to pay high rent for leasing a place for the cake shop.”
Agnes replied, “It looks workable but I’m worried about the risks involved in running an online cake shop. Let alone the above, we will then need to deliver the cake to the customers, by which I have to buy a lorry and hire a driver for the delivery. Will it lead to even more risks?”
Michael said, “Don’t worry, there is always risks associated with doing business. Some are speculative risks while others would be pure risks. For the pure risks, we can take out insurance to protect against them.”
a) What is speculative risk and pure risk and why these two have to be distinguished?
Give one example for each with reference to Agnes’ cake shop. ( 6 marks) b) What risks do you think Agnes may involve if she buys a lorry and hires a driver for
delivery. Suggest corresponding insurance that Agnes can take out. (12 marks) c) Let alone Michael’s view, what other risks do you think Agnes may need to face even
if she sells her cakes online? Suggest one corresponding insurance that she can take out as protection.