Competency

Evaluate the components of operational risk and the application of corresponding risk management plans.

Instructions

LTD Acceptance is a private property and auto insurance carrier thatspecializes in sports cars and motorcycles. This organization is ownedby LTD Capital, a large equity group with over 15 holdings. LTDAcceptance is the parent company's single largest holding as it drives70% of total revenue. Due to the inherent risk involved in that segmentof the market, many of LTD Acceptance's competitors do not offerpolicies for sports cars or motorcycles. This market segment isunderserved which is why the organization has 20,000 active policies fora sports car or a motorcycle.

LTD is headquartered in Houston, TX. LTD does not sell insurancedirectly to the public. Instead, it uses third-party agents to sell itspolicies. LTD handles all customer service needs including claimsintake, policy services, and general questions. The company operates infour states: California, Texas, Louisiana, and Florida. Currently, LTDdoes not have an active system in place to ensure that its agents are infact using LTD guidelines to screen potential policyholders. However,no evidence of negligence has emerged so far as the organization has yetto have a year in which it was not profitable. LTD has also had thegood fortune of not suffering losses because of natural disasters orcatastrophic events.

Organizations in every sector experience breakdowns or failures thatcompromise the efficiency and efficacy of their operations. Thisconcept is defined as an operational failure. Operational failures have adirect and adverse impact on profitability. As such, the shareholderswant assurance that the risk management team is actively working onmitigating the occurrence of these failures. As the newly hired seniorrisk analyst, you are responsible for outlining a plan to do just that.
For this deliverable, provide a report to your supervisor whichprovides a framework for managing operational risk exposures. Yourreport should include the following:

• Explain why the operational losses cannot be broadly managed. Why do they have to be categorized?
• For each operational risk exposure listed below, provide at leasttwo examples of potential losses from the exposure and reasons why youneed to manage it.
  • Internal fraud
  • External fraud
  • Employment practices and workplace safety
  • Clients, products, and business practices
  • Damage to physical assets
  • Business disruption and system failures

Your conclusion should align the effective management of operational risk exposures with organizational effectiveness.