Question

14. Once a risk occurs a manager has four methods available for dealing with it. Identify and briefly explain each. Which of them would you recommend to your company and why? 15. Explain claim procedures with respect to loss or damage to property or life, indicating what both the insured and the insurer is expected to do in such situations. 16. Explain any four of the laws of investment 12 Distinguish direct investment from indirect investment and give examples of short term and long term investments 18. A Client has tasked you to prepare a financial plan for her. She requires to see the process you will use. Itemise the first FOUR of the processes 19. In terms of models, write down any FOUR of the types of financial planning 20. Write down the effect of the following on the Balance Sheet (show which Assets/Liabilities increase and what decrease) ASSET LIABILITY i Kofi started business with Ghc50,0000 cash ii. He bought goods worth Ghc600 on credit iii. He paid cash of Ghc150 to creditors

All the questions or as many as you have knowledge of for comparison purposes. Thank you.

Answer 1

14)

Every risk we face can be addressed in one of four ways. Each may be an appropriate choice, depending on the circumstances and type of risk in question:

1. Avoidance
2. Reduction
3. Transfer
4. Retention

1. Avoiding Risk

The surest way to prevent the potential loss arising from a certain activity is to completely avoid it. For example, if I want to avoid the possibility of having to pay for a stranger’s medical expenses due to an auto accident, I could stop driving a car. So why not just avoid all risks?

The problem is that whenever we avoid a risk we also miss out on the benefits we could have received for participating in the associated activity. In addition, not all risks can be completely avoided, such as the risks of illness or natural disaster.

Avoidance may be appropriate for a limited number of risks that produce a high probability of loss, such as gambling, but it is not a practical solution for most risks. In some cases we may even create additional risks by trying to avoid a particular risk. For example, we may be tempted to keep all of our savings in cash to avoid the risk of investment losses, but then we would be subjecting ourselves to the potential risk of loss by inflation, which is practically guaranteed to significantly erode the value of our cash over time.

2. Reducing Risk

If we are unable or unwilling to avoid an activity, we can take steps to reduce the probability and potential severity of loss associated with the activity. For example, when we choose to drive, we can reduce the risk of being involved in an automobile accident by observing the speed limit and other traffic laws, not texting while driving, and not driving while drowsy or drunk. We can also reduce the severity of injury to ourselves in the case of an accident by always wearing our seat belts and by driving vehicles with airbags.

3. Transferring Risk

Another way to deal with risks we are unable or unwilling to completely avoid is to transfer them to a third party. We can transfer risk in several ways, but the most practical, cost-effective, and common approach for high-severity risks with a low probability of occurrence is through insurance. The most effective use of insurance is to cover only the unlikely potential losses which would financially devastate us if they occurred. In these areas, we should seek to maximize our protection and minimize the cost.

Life insurance is one example of appropriate risk transfer. If a young breadwinner with a non-working spouse and small children were to pass away prematurely, his or her family would find themselves in a very desperate financial situation. A young family is not likely to have enough assets to care for its own long-term needs without the breadwinner’s earned income, so transferring the risk of his or her premature death to an insurance company is usually the best solution.

4. Retaining Risk

If we do not make a conscious decision to avoid or transfer a risk, then by default we retain it, accepting full responsibility for the potential loss. In some cases, retaining a risk is no big deal. In other cases, retaining a risk could completely devastate us. Retention is the most suitable approach when the potential severity of a loss is low, regardless of how frequently it is expected to occur, or if the cost of insuring the risk would be higher over time than the actual potential loss incurred.

Prudent Risk Management

How can we know which of the four risk management approaches is the best for any given risk? Prudent principles dictate the following:

1. If the expected frequency and loss severity of a risk are high, we should avoid the risk, because retaining or insuring the risk would be far too expensive.
2. If the expected frequency is low but the potential loss severity is high, we should transfer the risk to a third party, such as an insurance company.
3. If the expected loss severity of a risk is low, regardless of how frequently it may occur, we should retain the risk.
4. When retaining or transferring a risk, we should also reduce the potential frequency and severity of losses as much as possible.

Once we are aware of the biggest threats to our financial security and have decided which of the four risk management techniques we will employ to address each risk, we can be at peace knowing that we did the best we could. We will have a plan in place so we no longer have to worry about how we would cope if disaster struck.

Often it makes sense to utilize a combination of techniques to manage a particular risk. For example, to return to our driving example, we could refuse to drive at night if we have poor eyesight (avoiding risk), always wear seat belts and obey traffic laws (reducing risk), maintain high liability limits on auto insurance (transferring risk), and choose high deductibles to decrease insurance premiums (retaining risk).

15)

An insurance claim is a formal request to an insurance company asking for a payment based on the terms of the insurance policy. The insurance company reviews the claim for its validity and then pays out to the insured or requesting party (on behalf of the insured) once approved.

The non-life insurance industry is witnessing shifting trends across policy administration, and claims—the two core functions in insurance.

The claims process is the defining moment in a non-life insurance customer relationship. To retain and grow market share and improve customer acquisition and retention rates, insurers are focused on enhancing customers’ claims experience.

In a highly competitive insurance market, differentiation through new and more effective claims management practices is one of the most important and effective ways to maintain market share and profitability.

In particular, insurers can transform the claims processing by leveraging modern claims systems that are integrated with robust business intelligence, document and content management systems. This will enhance claims processing efficiency and effectiveness. It can benefit the insurers both operationally and strategically by enabling them to reduce claims costs to improve their combined ratio, improve claims processing efficiency, and drive customer retention and acquisition.

Today in any insurance office the claim process is built on

Claim document & content management tool

Mobile based & smart phone based technology solutions the key

STP processing to minimize delay

Modern claim processing platform which is seamless & robust

Normal claim process followed by General Insurers

An insured or the claimant shall give notice to the insurer of any loss arising under contract of insurance at the earliest or within such extended time as may be allowed by the insurer.

On receipt of such a communication, a general insurer shall respond immediately and give clear indication to the insured on the procedures that he should follow. In cases where a surveyor has to be appointed for assessing a loss/ claim, it shall be so done within 72 hours of the receipt of intimation.

Where the insured is unable to furnish all the particulars required by the surveyor or where the surveyor does not receive the full cooperation of the insured, the insurer or the surveyor as the case may be, shall inform in writing the insured about the delay that may result in the assessment of the claim.

The surveyor shall be subjected to the code of conduct laid down by the Authority while assessing the loss, and shall communicate his findings to the insurer within 30 days of his appointment with a copy of the report being furnished to the insured, if he so desires. Where, in special circumstances of the case, either due to its special and complicated nature, the surveyor shall under intimation to the insured, seek an extension from the insurer for submission of his report.

In no case shall a surveyor take more than six months from the date of his appointment to furnish On receipt of the survey report or the additional survey report, as the case may be, an insurer shall within a period of 30 days offer a settlement of the claim to the insured. If the insurer, for any reasons to be recorded in writing and communicated to the insured, decides to reject a claim under the policy, it shall do so within a period of 30 days from the receipt of the survey report or the additional survey report, as the case may be.

Upon acceptance of an offer of settlement by the insured, the payment of the amount due shall be made within 7 days from the date of acceptance of the offer by the insured. In the cases of delay in the payment, the insurer shall be liable to pay interest at a rate which is 2% above the bank rate prevalent at the beginning of the financial year in which the claim is reviewed by it.

How to Make a Claim under Motor insurance

A claim under a motor insurance policy could be

For personal injury or property damage related to someone else. This person is called a third party in this context) or

For damage to insured own vehicle. This is called an own damage claim and insured is eligible for this if he is holding what is known as a package or a comprehensive policy.

Third Party Claim

In a third party claim, where insured vehicle is involved, it is important to ensure that the accident is reported immediately to the police as well as to the insurance company. On the other hand, insured is a victim, that is, if somebody else’s vehicle was involved, he must obtain the insurance details of that vehicle and make intimation to the insurer of that vehicle.

Own Damage Claim

In the event of an own damage claim, that is, where insured vehicle is damaged due to an accident, insured must immediately inform insurance company and police, wherever required, to enable them to depute a surveyor to assess the loss.Insured must not attempt to move the vehicle from the accident spot without the permission of police and insurer.

Theft Claim

If P H own vehicle is stolen, he must inform the police and the insurance company immediately. In addition you must keep the transport department also informed. As soon P H receives the policy document, he must read about the procedures and documentation requirements for claims.

If P H has to make a claim, he must ensure that he collects all the required documents and submit them along with the requisite claim form duly filled in, to the insurance company. There may be certain specific documentation requirements for specific types of claims. For instance in respect of a theft claim, there is a special requirement that P H should surrender the vehicle keys to the insurance company.

Property insurance claim

There could be several types of policies that cover property and the property itself could be stationery - like a building, or moving around - like your household goods being transported.

P h on receipt of policy document must familiarize himself with the documents required for a claim as well as the procedures to be followed.

Whether or not a claim arises P H must follow the various dos and don’ts in respect of his property for the duration of the policy. These dos and don’ts are termed warranties and conditions in the policy document. In general, losses and damages, including those due to theft, fire and flood need be intimated to the relevant authorities such as the police, the fire brigade and so on. It is important to ensure that P H must intimate insurance company to enable it to send a surveyor for surveying and assessing the loss.

Travel insurance claim

Travel insurance policy is generally a package policy that includes different types of covers like hospitalization, personal accident, loss/ damage to baggage, loss of passport and so on.
The procedure and documents required for a claim would vary from cover to cover.

For ease of procedure and convenience, insurers normally attach the claim form with the policy document. This will contain the list of documents required in case of a claim and also the contact details including phone numbers of the claims administrator either in the destination country to which you are traveling or in another country that is designated to receive and process your claim intimation.

Formalities for a health insurance claim

P H can make a claim under a Health insurance policy in two ways:

Cashless basis and

Reimbursement basis

On a Cashless basis: For a claim on cashless basis, treatment must be only at a network hospital of the Third Party Administrator (TPA) who is servicing your policy. P h must seek authorization for availing the treatment on a cashless basis as per procedures laid down and in the prescribed form. He must read the policy document as soon as he receives it, to understand claim process and not read it at the time claim arises.

Claims on reimbursement basis: P H must read the clause relating to claims in policy document as soon as he receives it to ensure that he understands the procedure and the documents required for making a claim on reimbursement basis. When a claim arises he should inform the insurance company as per procedures required. After hospitalization, he has to ensure that he obtains and keep ready documents such as claim form, discharge summary, prescriptions and bills that he should submit for a claim.

Every insurer in their website clearly provide all relevant information relating to

How to lodge a claim

What documents to be kept in possession

Whom to be contacted to lodge a claim

What information needs to be provided in lodging a claim

Claim process adopted by the insurer

How to follow up on claims lodged

Help desk details to support customer service

This information are also included as part of policy document in every sales brochure or communication.

16)

There aren’t too many laws when it comes to investing, but some things are always certain, even when it comes to investing. If you are thinking about investing in stocks any time in the future, or are currently invested in the stock market, make sure that you understand these laws. They are the truth of the market as we know it today!

Here are the four laws for investing in stocks. Make sure that you follow them because they are always true:

1. You Don’t Know More Than Anyone Else

Sorry, but unless you’re Gordon Gekko, you don’t know more than anyone else investing in the stock market today. All of the information is out there. For most investments, it is more of a question as to whether people are paying attention or not. It’s not a question of the information being available. The way to speed around this law is to do your homework. Just realize that you are probably reading the same public information as analysts on Wall Street.

2. There is No Free Lunch

The stock market is a zero sum game. Every time you are able to buy a stock, it is because someone else is selling it. Now, you have to ask yourself, why would they be selling? What do they know that I don’t? There is no free lunch in the stock market, and you need to make sure that you realize that from the start.

3. Nobody is Vested Except for Yourself

Investing means that you are putting your own money on the table. That makes you the only one invested in your positions. Even if you use a stock broker, or relied on some other source for advice, unless they are matching your position dollar for dollar, you are the one who needs to make the call. Make sure that you’re fully informed and know what you’re getting into, because it’s your money.

4. Nothing is Ever Certain

In the stock market, nothing is ever certain. The market will go up. The market will crash again. It is inevitable – it is more a question of when rather than if.

And who knows by how much. It really could lose 90% of its value. There is no reason why it couldn’t. Realize this when you invest.

17)

Direct investments are those in which the investor owns the particular assets himself, while indirect investments are investments made in vehicles that pool investor money to buy or sell assets, according to Red Mountain Asset Research. A direct investor invests in the asset itself, whereas an indirect investor invests in the expertise of the people using his investment money, notes the National Association of Real Estate Investment Trusts.

A direct investor is wholly responsible for the asset, has control over it, reaps all of the rewards and assumes all of the risks, according to Property24.com. Indirect investors let others buy and sell the assets, while assuming no ownership of the assets and taking no responsibility for them, reaping only a share of any profits that are distributed among all of the indirect investors.

Examples of indirect investments are mutual funds, pension funds and 401(k) plans, explains CNN Money. They can also be REITs, which are real estate investment trusts. An REIT could use investor money to buy large commercial properties such as malls, office buildings and hotels. An example of a direct investment would be owning a house and acting as a landlord or hiring a property manager, being responsible for upkeep and taxes, keeping all of the rent collected and assuming all of the gains or losses when the property sells.

Examples of long-term investments are

1. Stocks. In a lot of ways, stocks are the primary long-term investment. ...
2. Long-term Bonds – Sometimes! ...
3. Mutual Funds. ...
4. ETFs. ...
5. Real Estate. ...
6. Tax Sheltered Retirement Plans. ...
7. Robo-Advisors. ...
8. Annuities.

Examples of short-term investments are high-yield savings accounts, CDs, money market accounts, treasury bills, and government bonds. The investment should easily convert to cash when the time is right

19)  

Here is a list of the 10 most common types of financial models:

Three Statement Model

Discounted Cash Flow (DCF) Model

Merger Model (M&A)

Initial Public Offering (IPO) Model

Leveraged Buyout (LBO) Model

Sum of the Parts Model

Consolidation Model

Budget Model

Forecasting Model

Option Pricing Model

#1 Three Statement Model

The 3 statement model is the most basic setup for financial modeling. As the name implies, in this model the three statements (income statement, balance sheet, and cash flow) are all dynamically linked with formulas in Excel. The objective is to set it up so all the accounts are connected, and a set of assumptions can drive changes in the entire model. It’s important to know how to link the 3 financial statements, which requires a solid foundation of accounting, finance, and Excel skills.

#2 Discounted Cash Flow (DCF) Model

The DCF model builds on the 3 statement model to value a company based on the Net Present Value (NPV) of the business’ future cash flow. The DCF model takes the cash flows from the 3 statement model, makes some adjustments where necessary, and then uses the XNPV function in Excel to discount them back to today at the company’s Weighted Average Cost of Capital (WACC).

These types of financial models are used in equity research and other areas of the capital markets.

#3 Merger Model (M&A)

The M&A model is a more advanced model used to evaluate the pro forma accretion/dilution of a merger or acquisition. It’s common to use a single tab model for each company, where the consolidation of Company A + Company B = Merged Co. The level of complexity can vary widely and is most commonly used in investment banking and/or corporate development.

#4 Initial Public Offering (IPO) Model

Investment bankers and corporate development professionals will also build IPO models in Excel to value their business in advance of going public. These models involve looking at comparable company analysis in conjunction with an assumption about how much investors would be willing to pay for the company in question. The valuation in an IPO model includes “an IPO discount” to ensure the stock trades well in the secondary market.

#5 Leveraged Buyout (LBO) Model

A leveraged buyout transaction typically requires modeling complicated debt schedules and is an advanced form of financial modeling. An LBO is often one of the most detailed and challenging of all types of financial models as the many layers of financing create circular references and require cash flow waterfalls. These types of models are not very common outside of private equity or investment banking.

#6 Sum of the Parts Model

This type of model is built by taking several DCF models and adding them together. Next, any additional components of the business that might not be suitable for a DCF analysis (i.e. marketable securities, which would be valued based on the market) are added to that value of the business. So, for example, you would sum up (hence “Sum of the Parts”) the value of business unit A, business unit B, and investments C, minus liabilities D to arrive at the Net Asset Value for the company.

#7 Consolidation Model

This type of model includes multiple business units added into one single model. Typically each business unit is its own tab, with a consolidation tab that simply sums up the other business units. This is similar to a Sum of the Parts exercise where Division A and Division B are added together and a new, consolidated worksheet is created. Check out CFI’s free consolidation model template.

#8 Budget Model

This is used to model finance for professionals in financial planning & analysis (FP&A) to get the budget together for the coming year(s). Budget models are typically designed to be based on monthly or quarterly figures and focus heavily on the income statement.

#9 Forecasting Model

This type is also used in financial planning and analysis (FP&A) to build a forecast that compares to the budget model. Sometimes the budget and forecast models are one combined workbook and sometimes they are totally separate.

#10 Option Pricing Model

The two main types of models are binomial tree and Black-Scholes. These models are based purely on mathematical models rather than subjective criteria and therefore are more or less a straightforward calculator built into Excel.

20)

i)kofi started business with Ghc 50,0000 cash then " Under assets side Cash A/c is shown with Ghc 50,0000

and under liabilities side Capital A/c is shown with Ghc 50,0000 i.e Assets increases with Ghc50,0000 and Liabilities increases with Ghc50,0000"

ii)Kofi bought goods worth Ghc600 on credit then " Unders assets side inventory increases with Ghc500 and under liabilities side Accounts Payables A/c increases with Ghc600 i.e. assets increases and liabilities increases"

iii)Kofi paid Ghc150 paid to creditor then " Under assets side cash is decreases with Ghc150 and liabilities side Accounts Payables decreases with Ghc150 i.e. assets decreases & liabilities decreases"