Plan For Managing Operational Failures

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 that
specializes in sports cars and motorcycles. This organization is owned
by LTD Capital, a large equity group with over 15 holdings. LTD
Acceptance is the parent company’s single largest holding as it drives
70% of total revenue. Due to the inherent risk involved in that segment
of the market, many of LTD Acceptance’s competitors do not offer
policies for sports cars or motorcycles. This market segment is
underserved which is why the organization has 20,000 active policies for
a sports car or a motorcycle.

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

Organizations in every sector experience breakdowns or failures that
compromise the efficiency and efficacy of their operations. This
concept is defined as an operational failure. Operational failures have a
direct and adverse impact on profitability. As such, the shareholders
want assurance that the risk management team is actively working on
mitigating the occurrence of these failures. As the newly hired senior
risk analyst, you are responsible for outlining a plan to do just that.
For this deliverable, provide a report to your supervisor which
provides a framework for managing operational risk exposures. Your
report 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 least
    two examples of potential losses from the exposure and reasons why you
    need 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.