Assignment on Strategic Management Accounting

Running head: FINANCE
FPC004 AS2 v6A1
Name of the Student
Name of the University
Author Note

STRATEGIC MANAGEMENT ACCOUNTING1
Table of Contents
Section A......................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................3
Section B......................................................................................................................................4
Question 1....................................................................................................................................4
Question 2....................................................................................................................................7
Question 3....................................................................................................................................8
Question 4..................................................................................................................................10
References..................................................................................................................................13

STRATEGIC MANAGEMENT ACCOUNTING2
Section A
Question 1
a) A pure risk is a situation in which there is only the possibility of a loss or no loss being
incurred by the person undertaking the risk. Speculative risk is one where there is a
possibility of the taxpayer either earning a profit or a loss based on circumstances.
b) A diversifiable risk is one which can be avoided by changing the investments in the
portfolio of the investor. However, a non-diversifiable risk is inherent and cannot be
avoided by changing the portfolio.
c) Disability is a personal risk whereas investment in shares is a speculative risk. A
technological change is a diversifiable risk whereas inflation is a non-diversifiable risk.
Question 2
The most significant laws in the Australian insurance industry are the Insurance Act
1973, Insurance Contracts Act 1984, Insurance Contracts Amendment Act 2013 and
Corporations Act 2001. Insurance Act 1973 is a key act which sets the suitability guidelines for
the companies operating in the industry. If the customers feel that the company may be suffering
from an unsatisfactory management or an unsatisfactory financial position, this law may be
immediately called upon by them to protect their interests. Similarly, if a company winds up, it is
ensured that the interests of the policy holders are protected. The Insurance Contracts Act 1984
ensures that the correct information is provided by the insurance companies to the insured. If
there is any hidden information which is not properly communicated, the insured may call upon
this act. The Insurance Contracts Amendment Act 2013 states that the insured should avoid
misrepresenting themselves under any circumstances. Otherwise, it would result in the
cancellation of their contract and hence should be avoided in all circumstances. The Corporations

STRATEGIC MANAGEMENT ACCOUNTING3
Act 2001 states that the insurer should take utmost care about the situation of the insured and the
policy which is being formulated should not contain any form of deception in the insurance
contracts or the conduct of the company (Wood 2017).
Question 3
a) The main purpose of an underwriter is to provide the most appropriate policy for a
customer with the right amount of premium which does not make losses for the company.
If the family health history is not very healthy, then the risk of the patient suffering from
a disease is higher. Similarly, people involved in risky jobs like car racing have higher
risk of meeting with an accident. Drug abuse and health history also have a long term
impact on individuals. Hence, these are considered as determinants in the health of an
individual and need to be considered in the risk assessment procedures (Cornell et al.
2016).
b) The constant increase in premiums results in the policies becoming unfavourable to the
policy holders and they may opt out of the policy due to the higher costs. This will force
the company to lower its premiums to retain the customers for a long period of time.
However, reducing the premiums results in an increase in the risk concentration of the
company. Due to an increase in risk concentration, the claim costs, earnings volatility and
the profitability of the business all tend to go down. Hence, constantly increasing
premiums is not a profitable sign for the business (French, Vital and Minot 2015).