INSTRUCTION: THE ASSIGNMENT SHOULD HAVE TO BE DONE ON AN

INDIVIDUAL BASIS:
1. Discuss the steps in risk management planning?

The five steps of the risk management process are identification, assessment, mitigation, monitoring,
and reporting risks. Here’s a brief overview of each step:

1. Identification: This step involves identifying potential risks that could impact your project or
business.
2. Assessment: Once you’ve identified potential risks, you need to assess them to determine their
likelihood and potential impact.
3. Mitigation: After assessing risks, you can develop strategies to mitigate them and reduce their
impact on your project or business.
4. Monitoring: It’s important to monitor risks to ensure that your mitigation strategies are effective and
that new risks aren’t emerging.
5. Reporting: Finally, you should report on your risk management activities to stakeholders and other
interested parties1.

2. Describe briefly the three types of insurance that all operators should carry?

There are many types of insurance policies that operators can carry, but I will describe three of them
briefly:
1. Liability insurance: This type of insurance covers damages that you may cause to other people or
their property while operating your business. It can help protect your business from lawsuits and
claims.
2. Property insurance: This type of insurance covers damage or loss of property that you own, such as
buildings, equipment, and inventory.
3. Workers’ compensation insurance: This type of insurance provides benefits to employees who are
injured or become ill as a result of their work. It can help cover medical expenses, lost wages, and
other costs associated with workplace injuries.

3. List and explain the basic components of financial risks?

Risk is a common component of business. Business owners cannot run a company without facing
some type of risk. Financial risk usually relates to financing small business operations. This risk
involves the possibility of business owners losing large amounts of capital when using debt
financing for starting or operating their company. Financial risk can also relate to making
investments in other companies. Business owners choose to make investments in other companies
to develop passive income streams and increase their company's economic value added.

Interest Rate

The interest rate is often the number-one component of financial risk. Banks and lenders offer
business loans at a specific interest rate. Business owners should view a loan’s interest rate as the
cost of doing business. In economic terms, the interest rate is often called the cost of money. The
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 cost of money represents payments the business owner must make to the bank or lender for the
opportunity to receive a loan from the bank. High interest rates can significantly increase the cost
of doing business. Adjustable interest rates can increase financial risk since the rate fluctuates
based on the nation’s monetary policy.

Amount of Credit

The amount of credit represents the size of business loans offered to a company. Banks and lenders
commonly review the company’s financial history to determine how much money to loan the
business owner. Small business owners receiving copious amounts of credit may overextend their
company by using too much credit. Conversely, small businesses experiencing high growth and the
inability to obtain credit may not grow their business as quickly as possible. Business owners must
carefully review the banking environment to ensure enough credit is available prior to expanding
operations.

Cash Flow

Cash flow plays an important role in financial risk. Business owners often use external financing to
start their new business venture. External financing represents fixed cash outflows that must be
paid regardless of the company’s profitability. Disruptions in business operations or economic
downturns do not absolve the business owner of the obligation to make loan payments. Businesses
with sluggish sales and high cash outflows may also endanger their owners’ personal financial
assets.

Market Risk

Financial risks can also be linked to the overall market risk in the business environment. Market
risk is the probability of loss a business owner faces from the entire banking industry. Banks who
continually engage in risky lending practices can increase the financial risks of small businesses.
Banks with increasingly diminished returns or those that buy and sell toxic loans can increase the
market risk relating to business financing.

4. Define the term life insurance and list out the characteristics of life insurance?

Life insurance is a legally binding contract that pays a death benefit to the policy owner when the
insured person dies1. It is a policy which covers the risk of premature death2. For a life insurance
policy to remain in force, the policyholder must pay a single premium upfront or pay regular
premiums over time1. When the insured person dies, the policy’s named beneficiaries will receive the
policy’s face value, or death benefit1.
Some of the characteristics of life insurance include:
 It provides financial protection against unexpected events such as death or disability.
 It can be used as an investment tool.
 It can be used as a tax-saving instrument.
 It can be customized to meet individual needs and preferences.

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 5. Define the following terms:
 Term insurance

Term life insurance is a type of life insurance policy that provides coverage for a
certain period of time, or a specified “term” of years. If the insured dies during the
time period specified and the policy is active, or “in force,” then a death benefit will
be paid.

Term insurance is initially much less expensive compared to permanent life

insurance, such as whole life and universal life. This is because it’s not designed to
last through old age, which is when life insurance premiums are the most expensive.
And, unlike most types of permanent life insurance, term life insurance has no cash
value.

 Whole life insurance

Whole life insurance, also known as traditional life insurance, provides permanent
death benefit coverage for the life of the insured. In addition to paying a death
benefit, whole life insurance also contains a savings component in which cash value
may accumulate. Interest accrues at a fixed rate and on a tax-deferred basis.

Whole life insurance policies  are one type of permanent life insurance. Universal life,
indexed universal life, and variable universal life are others. Whole life insurance is
the original life insurance policy, but whole life does not equal permanent life
insurance as there are many types of permanent life.

 Endowment insurance

Endowment insurance is a policy that aims to combine the features of a life insurance and
a financial plan, usually a college education for the child of the insured. Its premiums are
more expensive compared to similar policies.The policy matures on a fixed date and that
is when the insured gets his or her payout.

Put simply, it’s a life insurance policy that doubles as an investment or a savings account.
It pays a lump sum after a specified number of years or upon death. 

Each month you put a set amount of money into an account, and a specific portion of that
money is used to buy life insurance. The rest is put into an investment fund. 

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 6. List out the three primary elements in life insurance rate making?

The premium rate for a life insurance policy is based on two underlying concepts: mortality and
interest. A third variable is the expense factor which is the amount the company adds to the cost of
the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.
Mortality
Life insurance is based on the sharing of the risk of death by a large group of people. The amount at
risk must be known to predict the cost to each member of the group. Mortality tables are used to give
the company a basic estimate of how much money it will need to pay for death claims each year. By
using a mortality table a life insurer can determine the average life expectancy for each age group.
Interest
The second factor used in calculating the premium is interest earnings. Companies invest your
premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of
interest on these invested funds.
Expense
The third consideration is the expenses of operating the company. The company estimates such
expenses as salaries, agents' compensation, rent, legal fees, postage, etc. The amount charged to
cover each policy's share of expenses of operation is called the expense loading. This is a cost area
that can vary from company to company based on its operations and efficiency.

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