Case Study $($Glacial Tech Inc.$)$

QUESTION $4(90$ Marks$)$

Background

Glacial Tech Inc. is a multinational company specializing in manufacturing and

distributing electronic components. With headquarters in the United States, it has plants

in China, Mexico, and Germany. The company employs about $10,000$ people globally.

In July $2023,$ Glacial Tech$$s manufacturing plant in Mexico experienced a significant

disruption due to a fire caused by an electrical fault. The fire led to a halt in production

for two weeks and caused substantial damage to critical machinery. The total direct loss

from the fire was estimated at R$25$ million. Furthermore, the disruption affected Glacial

Tech$$s supply chain, delaying orders and damaging relationships with key clients.

Before the incident, Glacial Tech had a comprehensive risk management strategy that

included a mix of self$-$insurance and transfer strategies. The company retained some

risks through a captive insurance company and transferred significant potential risks to

third$-$party insurers, including property damage and business interruption risks.

Glacial Tech had identified fire as a key risk given its potential to impact production

significantly. This risk was continuously assessed as part of the company$$s overall

operational risk management framework. The company regularly conducted risk

assessments that included scenario analysis and business impact analysis. This helped

in quantifying potential losses and understanding the impact on business operations.

Glacial Tech implemented several risk controls, including installing state$-$of$-$the$-$art fire

suppression systems, conducting regular safety audits, and training employees on

emergency response procedures. The decision to use a combination of self$-$insurance

and risk transfer via insurance policies was based on the company$$s risk appetite and

financial capacity to absorb losses. The captive insurance model helped in managing

predictable losses and improving cash flow stability, while third$-$party insurance covered

catastrophic risks.

Source: Lecturer$$s Creation

$4\mathrm{.}1$ Explain four $(4)$ advantages of using a captive insurance company for operational risk

management.

$(20)$

$4\mathrm{.}2$ Evaluate the effectiveness of Glacial Tech$$s risk transfer strategy in the context of the

incident.

$(10)$

$4\mathrm{.}3$ What additional risk financing options could Glacial Tech consider to enhance its

resilience to such operational risks? Explain a maximum of $4.$

$(40)$

$4\mathrm{.}4$ How can Glacial Tech Inc. enhance its operational risk monitoring framework to better

anticipate and respond to disruptions similar to the fire incident in its Mexico plant?

Provide $5$ detailed analyses incorporating advanced risk management concepts.