R130 - Risk Financing R130: Risk Financing Assignment 4 Case Study Overview of Operations Richley Stores owns and operates ve home improvement stores throughout Saskatchewan and Manitoba. Each store carries a large selection of general hardware, plumbing supplies, electrical supplies, lumber, and tools. Stock for all ve stores is purchased in a centralized manner to take advantage of bulk discounts where they exist. Typically, Richley works with large distribution companies based in Canada, the United States, and Europe. Orders are typically made monthly, and sales are made in the seller's currency. Richley has two types of clients: individuals who make smaller purchases and pay upfront, and corporate construction clients whose orders can be thousands of dollars each. To increase customer loyalty, Richley allows these corporate clients to pay up to 30 days after the purchase. The retailer's products can be bought through its physical stores and online shop. The company began as an in-person retailer only, but moved into online retailing last year after taking out a loan. After months of working with web developers, the online shop opened two months ago, and business is booming. The success is great news for the company, but there is some concern about whether they can continue to provide excellent supply and service with so much new demand. The Richley corporate culture emphasizes entrepreneurship and accountability at the individual store level. Managers are compensated based on performance, with store protability being a key indicator. Hazard Risk Cost-Allocation System For years, Richley Stores has used a relatively simple hazard risk cost-allocation system. Hazard risk expenses are allocated evenly to each store, and insurance premiums have been split between stores based on value of inventory (see exhibits below). Richley insures its property and general liability exposures through guaranteed-cost insurance with a company-wide premium of $500,000. Premium Cost Allocation by Store Average In sur ance # of 0/o of Store Inventory Premium , ' Total _ V" alue Cost Allocation 119378455698 $ 76914 $4,211,562 $ 84,231 Em ployees Protability and Loss Claims by Store Store 2019 Net Prots Last 3 X ears Loss Claims (Averaged) l $37,336,873.79 $53,839.80 2 $43,418,164.95 $81,704.07 3 $67,056,621.95 $93,477.05 Richley's senior leaders want to re-evaluate their hazard loss cost-allocation system and have hired a risk management professional to update the system. Their objectives are as follows: 0 Allocating costs so that the stores are held accountable for loss control 0 Using a system that is driven by actual loss experiences 0 Rewarding store managers who outperformed others Questions Please answer the questions below. Your responses should be written in full sentences (not bullet points) and organized into appropriate paragraphs. Lesson 9 1. Describe FOUR (4) financial risk exposures. Be sure to describe both the nature of the risk and how it applies to the company. 2. How could Richley mitigate each of these risks? Lesson 10 3. How could capital market products help Richley? Suggest two ways each of the capital market products could help. So, you will make TWO (2) suggestions about insurance-linked securities, TWO (2) suggestions about insurance derivatives, AND make TWO (2) suggestions about contingent capital arrangements for a total of six suggestions. For each suggestion, make a connection with Richley's operations. Question 1: Use the point allocation below for EACH of the FOUR (4) financial risk exposures: No risk is provided. The risk is linked to Richley's operations with ONE (1) supporting point. The risk is linked to Richley's operations with TWO (2) or more supporting points. ONE (1) point for each of the following: i A risk is provided. 1-4 7 A description of the nature of the risk is provided (e. g., credit risk). Question 2: Points Use the point allocation below for EACH of the FOUR (4) mitigations: No risk mitigation is provided. A risk mitigation is provided without further elaboration. A risk mitigation is provided with TWO (2) or more supporting points. A risk mitigation is provided with ONE (1) supporting point. Question 3: Use the point allocation below for the following suggestions: Insurance-linked securities (x2) Insurance derivatives (x2) Contingent capital arrangements (x2) - No suggestion is provided. A suggestion is made but it is unclear how it relates to or is irrelevant for Richley's operations. Points An exceptional suggestion is made that illustrates a superior understanding of the capital market product. The connection to Richley's operations is insightful and unique. 12 34 A suggestion is made that demonstrates an understanding of both the capital market product and Richley's operations