RSK4803_Assignment_1_2021_Memo semester 1 and 2

Question 1 Present an analysis on the insurability of the chances of a business making a loss on a newly acquired subsidiary. (10) Answer Refer to Page 314 to 322 Key Words: Analysis, Insurability and Loss on a Newly Acquired Subsidiary - Candidates must show their knowledge of insurable risk. - Criteria that must be mentioned includes:  Fortuitous losses: Losses covered only if they are accidental. Busying a subsidiary is not an accidental loss but rather a calculated move.√  Risks must be geographically spread: Risks must not all in one place.√  Losses must be capable of financial measurement. One should be able to measure the loss when it occurs.√  It must not be against public policy to insure the risk. It must be legal to insure the risk.√  There must be a significant number of risks to form a pool. Insurance operates on law of large numbers where many put their money together to build a pool from which losses suffered by the few unfortunate will be paid.√  Premium must be reasonable. This requires the preceding requirement to be met. √ Maximum 6 Marks for insurable risk factors. - Important is the fact that insurance seeks to put back the insured in the same position s/he was in before the loss. Thus in this case it will be difficult to establish the position he was in before the loss.√ - Probability of loss is too high to justify economical use of insurance.√ - The level of indemnity would equate the expected return on the business. That means that the insurer now bears the business risk of running the business. - Moral risk is also very high and it will be difficult to include mechanisms to reduce it.√ - However one needs to note that insurers do offer loss of profits cover. √ - Loss of profits cover is only provided when the risk insured is covered under a material damage policy. That means cover is provided for losses that are insurable.√ Maximum 3 Marks for Applying Factors on the scenario given. - Conclusion: A newly acquired subsidiary falls short of the criteria for insurable risks and poses a huge risk that insurers are not willing to assume.√ (Must be motivated adequately)