Coursework 2: Post-Loss Financing Strategies for CED PLC

This assignment analyzes post-loss financing solutions for CED PLC, an international aircraft engine manufacturer facing significant financial challenges due to a design defect in its turbine blades. The company is dealing with operational difficulties and increased maintenance costs, leading to substantial debts and a need for effective financing strategies. The solution explores two primary post-loss financing options: self-insurance and commercial insurance. Self-insurance includes equity financing through the issuance of new shares and the establishment of a captive insurer. The assignment details the advantages and disadvantages of each approach, considering factors such as risk transfer, cost-effectiveness, and the ability to manage financial losses. Commercial insurance is also examined as a third-party solution. The analysis considers the benefits and drawbacks of each financing method, providing insights into how CED PLC can stabilize its finances, mitigate losses, and ensure long-term financial stability. The assignment emphasizes the importance of careful financial planning and risk management in addressing the company's current financial situation.

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Introduction
CED PLC is an international manufacturer which actually produces the aircraft engines
manufactured by the business. The financing solution in the business further needed to be
detected and further installation of the same is needed in that case. The operational
difficulties must be experienced with a major decrease in the maintenance cost of the new
engines. As reported by the airlines using the new engine, operational difficulties have been
experienced along with a significant increase in the maintenance costs associated with the
aircraft engine.
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CED PLC has reported a defect in the design of the turbine blades of engine needs to be
reported. The cost which are incurred by the CED includes the manufacturing of the turbine
blades along with the engines which are installed in the aircraft and compensation needed to
be made in that case.
Currently, CED deals with the significant manufacturer of the firm which may results in the
business prospects of the firm. The significant accumulation of debts over the last few years
are actually required by the business for the purpose of manufacturing the machines. The
share price of CED has doubled due to the fact that the success in the newly manufactured
engines will definitely enhance the business prospects of the firm and the overall
performance of the company.
The post financing solution of the company are needed to be discussed based on the post
financing solutions of the company. The financing solutions have both the advantages and
disadvantages which must be dealt by the upper level management of the organizations
accordingly. The financing solution of the business have both the advantages and
disadvantages associated with the business.
Post-Loss Financing Solutions
The two suitable post financing solutions are as follows:
1. Self-Insurance
2. Commercial Insurance
Self-Insurance
The company actually needs to consider the insurance which is actually quite needed to
create an impact in that case. The significant debts are associated with premium which
further becomes difficult for the company to meet the premium requirements. The insurance
in that case are needed to be resolved in case of the loss in finance which may be about 400
million pounds. Such huge amount are paid through the third party activities which are
related to insurance. Taking the additional loan is quite likely that the company may end up
in the bankruptcy and further it is needed by the upper level management of the firm is
required. Self-financing its insurance through either income stream portions or captive
insurance can lead to significantly better output and therefore, ensures the semblance
stability and liquidity during its course of financing its losses.
Self-insurance are further followed by the company in order to double the share price of the
business. The floating of additional capital in the market is also required by the company
which may take place in the long run. The performance boost in the financial statement of
the company is needed by the potential investors for the purpose of enhancing the business
prospects of the company. Additional capital in that case are needed to finance the losses
for the purpose of redesign and replacement of the turbine blades. The compensation of the
aircraft grounds are required which actually leads to the main reason behind the airlines
expenses to suffer. The financing issue which acts as the compensation of the aircraft is that
the airlines needs to deal with the expenses of the company. In case of the aircraft business,
the employees actually receives the higher compensation when receding in the ground state.
In order to reduce the compensation losses, the company would need to use available
resources to redesign and manufacture replacement turbine blades on an immediate basis.
This portion of the losses can be effectively financed by the company itself through equity
financing. The balance sheet includes the expenses which is needed to remanufacture the
blades of the airline for the purpose of immediate sales. It should also look into halting
installation in further aircraft, to limits its exposure of losses to limited airlines.
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A captive insurer is a form of self-insurance where the parent company further creates
insurance in order to finance the business losses associated. It is actually quite significant
for the business to manage the finance by expanding the exposure of the company. The
expansion of the business actually happens if the profit of the business is made by the
company. The insurer further generates profits in the business which actually utilized by the
parent companies by making the potential investment in the business. It is a suitable method
of self-financing its losses through captive insurance for CED PLC. The limitation on its form
of refinancing is that it should use it asses its cash flows such that the compensations are
effectively made to the airlines that are experiencing issues with the installed engines.
The self-loss financing for CED will be required by the company for the purpose of the
decision making process. Therefore, conclusively, the first solution for post-loss financing for
CED is self-insurance. It can be broken into two portions. The equity financing considered as
the floating of shares in the market in order to attract the potential investors in the business.
Firstly, using equity financing through floating more shares in the market to attract investors,
to finance its redesign and re-manufacturing for the turbine blades that need to be replaced
and reinstalled in the affected aircraft. Secondly the captive insurer needs to transfer the
potential loss of the business to the owners in order to meet the risk associated with the
business. It is suitable for CED PLC to manage its losses through a self-insurance scheme,
or at the very least, use it to minimise its expenditure.
Commercial Insurance
The commercial form of insurance is referred as the third party insurer who actually deals
with the potential loss in the business. The purpose of the insurer is to provide financing in
the business where the affected parties in the scenario are further dealt with the company
which is the CED PLC. The airlines in that case needs to install the new engines in the
business for the purpose of decision making.
Commercial insurance is a straight-forward process providing relevant assistance on behalf
of the insurer party. CED PLC would be required to pay off the set of payments which are
involved in the financing cost of the relevant accommodations made by the company.
Assuming local clients, the company would not be exposed to exchange rate or similar
overseas risks associated with the transactions that would fluctuate the cost of repayment.
Therefore, the line credit is significantly required by the business through the process of
generating insurance for the purpose of compensating the airline aircrafts during the
maintenance and replacement of the turbine blades. Therefore, the cost of production and
manufacturing is something CED would be bearing on its own expenditure. CED would
require financing it's manufacturing through its own income stream, preferably through its
income profits or through equity financing. Debt financing is currently not an option
considering the large amount of debt that the company has already incurred due to the
manufacturing of the engines that were unfortunately found to have an inevitable defect.
CED PLC needs to avoid the circumstances currently for the purpose of financing the losses
which took place during the event. For future references; however, it should perform stricter
quality assurance checks to ensure such occurrences in future are avoided at all possible
cost.
Commercial insurance is one of the solutions which actually took place based on the report
of the company which is CED PLC. Due to the current loss it is needed to providea stable
support to the losses which actually occurred. The significant coverage is case of insurance
for the purpose of compensating the occurrences of the clients. The commercial insurance is
needed in the future which actually consists of the low frequency and quite affordable in the
future. Based on the present situation it is needed to adopt the most appropriate solution
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which the company will further use at the time of the making up the potential losses in the
business.
Commercial insurance on the other hand provides the CED PLC at the time of the post loss
financing which is actually based on the regular payments and compensations are made in
case of further scenario. Furthermore, the remaining costs of loss can be financed by the
company through its own income stream, equity financing or cuts in the profit portions
generated each year. The cost of manufacturing replacement blades can be expensed out
on its balance sheets as an internal expense.
Benefits and Drawbacks of Post-Loss Financing Solutions
It is the most suitable solution for the CED PLC and the reason behind that is it helps to
make the business loss which is actually incurred. There are actually certain drawbacks and
benefits associated with the company. The analysis which is made in the particular section is
that is the position held by the CED PLC currently. It is further needed to have a clear
understanding regarding the implications in the CED. After performing the relevant analysis it
is needed by the company to have a better understanding regarding the opportunity cost
involved in it along with its merits and demerits.
Advantages and Disadvantages of Self-Insurance
The following are the advantages of opting for the self-insurance option for post-loss
financing.
Transferable Risk
The transferable risk is considered as one of the main advantages of the self-insurance
transferable risk. The company will further help the company to transfer the risk which are
associated with the business. The income must be developed by the business in order to
meet up with the norms associated in that case. It is needed to mitigate the loss which is
generate in the form of income and further strategies in that case is needed in order to
reduce the loss in the business. For instance, in case of turbine blade replacements, the cost
of manufacturing the blades can be shifted to the affected airlines and therefore, they can be
requested to make partial or complete payments for replacement and installation of the
turbine blades in the affected aircraft.
Less Costly
The internal management in the cash flow of the company is further capable to finance the
losses which are associated with the business. The financing cost in that case is needed for
the purpose managing the financial losses in the business. The self-insurance of the
company actually relies upon the internal management of the company which is actually
capable of financing the business loss in order to cover the post loss financing by taking the
help of the third-party vendor. For instance, insurance can be very costly if acquired through
third-party or any commercial vendor, and therefore, would increase expenses in the form of
premia payments over an extended period of time. This is the reason behind self-financing a
cheaper alternative for CED PLC which the company can actually opt for.
Mitigated Risk
The risk is needed to be mitigated at the time of the self-insurance by further reducing the
exposure of the post loss financing. Rather the strategy which is used by the capitive insurer
is basically cheaper in comparison to the loss exposure which took place in that case. It can
prove to be a cheaper and reliable option for CED since the expense of premia is bearable
and the contract is also fairly flexible due to the owner of the captive insurer being the parent
company itself. Furthermore, the income generated from the company can be utilised within
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CED as well for financing other losses such as the redesign and remanufacturing of the
turbine blades.
Following are the disadvantages of opting for self-insurance scheme as a method of
managing post-loss financing:
Uncertainty
There is uncertainty at the time of transferring the risk which is quite ambiguous in nature
and which also considers the uncertainty in that case. The risk transfers with the other party
is actually related to the certain amount of ambiguity. The uncertainty of an entity is further
Furthermore, there is an added uncertainty that the entity involved may not offer to
completely live up to their part of the bargain, making the use of risk transfer for post-loss
financing considerably risky and uncertain. CED PLC needs to incur the expenses which is
needed to deal with the entire post loss financing.
Loss Bearing
The main drawback in case of self-insurance is that the expenses must be bear by the
company. The manufacturing and redesign in the business involves certain cost for the
purpose of the renovation. The involved parties in this case are not inclined to pay off the
replacements blades where the cost will be bear by the CED. This will further help the
company in order to generate profit out at the time of the worst-case scenario. The liabilities
pf the business will definitely create impact in the business of the company along with
potential impact on the shareholders of the firm.
Reduced Premia Credit
Financing the business is conducted through the help of the captive insurer where there lies
the chance of transferring risk where the resources are limited. CED would inevitably be
bearing a major portion of its losses, without the option of acquiring more debt in fear of
eventual decline into bankruptcy. Therefore, the choice of transferring risk is therefore
limited, and at the cost of premium credits offered through the insuring entity for loss control
financing.
Advantages and Disadvantages of Commercial Insurance
Following are the advantages of opting for a commercial insurance solution for post-loss
financing for CED PLC.
Reduced Uncertainty
The biggest advantage of the commercial insurance is needed to be reduced by the upper
level management of the company. The insurance company in that case will further enter
into the agreement for the purpose of financing the cost associated with the business. There
are actually some of the default risk associated with the business. Hence, it is a reliable
option for CED to choose commercial insurance, given its proper coverage of the loss-
financing offered.
Value Added Services
The insurance companies are related to the specialized mitigation and risk management
which the company will get better position in case of the specialized services. The
specialized services in that case are mostly integrated towards the better performance which
is actually related to the post loss financing and further drafting the future contracts for
insurance. It can guide as well to other forms of insurance that the company can acquire to
mitigate future losses more effectively, allowing CED to focus its resources on manufacturing
and product design for future products rather than crumbling under the expense of losses,
pushed to the brink of bankruptcy.
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Tax Deductible
Taxation is actually considered as one of the major problems which each and every
company have to face. Actually, tax is levied upon the income streams which most of the
companies adopts some of the significant strategies in order to offset the amount of tax in
the business. The income of the company is actually derived from the premium which is
actually considered as the tax-deductible expenses. Hence, for CED, it is a suitable solution
considering lower future taxes through the benefit of insurance is favourable for the
company's prospects and risk management.
Costly in Premia
The other major demerit is regarding the commercial insurance which is quite an expensive
product needed to be considered. The insurance of the business is actually the
commendable insurance needed by the company in orer to mitigate the the additional risk
exposure in the business. Therefore, it makes such insurance schemes considerably
expensive for the parties seeking insurance. For CED, if it manages to generate good
income and profit streams, it would be beneficial, otherwise disastrous for it to opt for a
commercial mode of insurance as a post-loss financing solution.
Recommendation for CED PLC
From the above discussion it can be said that there is certain solution which are available for
the CED PLC which is required at the time of the post loss financing. The advantages and
disadvantages are significantly related to the financing solution and accordingly the
recommendation of the company is made.
The airline compensation is related to the grounded aircraft which is used for the purpose of
sharing the expenses with the insurance company which is actually the equity-based
financing the manufacturing cost. The commercial solution is suitable for CED PLC, and
therefore, it should proceed with the solution through negotiating with its potential clients and
manage its post-loss financing at the earliest. The compensation to the airlines is
considerably time-sensitive, hence requiring immediate action on behalf of CED PLC to
reduce possible added future expenses to the current loss situation of the defected engines.
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References
Books:
Rejda, George E. (2001) Principles of risk management and insurance, Seventh edition,
New York: Addison Wesley Longman, Inc.
Websites:
Advantages of Captive Insurance, Link:
https://dfr.vermont.gov/industry/captive-insurance/become-vermont-captive/advantages-
captive-insurance
Risk Management and Alternative Loss Financing Techniques, Link:
https://coggle.it/diagram/Wsq1OA68PYJ5nKVh/t/risk-management-alternatives-loss-
financing-techniques
The Use of Loss Financing of Catastrophic Risk, Link:
https://www.researchgate.net/publication/228127025_The_Use_of_Post-
Loss_Financing_of_Catastrophic_Risk
Post Loss Financing and Analysis of Business Recovery, Link:
https://www.globalriskexperts.com/direct-client-services/post-loss-analyses-business-
recovery.html
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Glossary of keywords
Analyse
Find the relevant facts and examine these in depth. Examine the relationship between
various facts and make conclusions or recommendations.
Construct
To build or make something; construct a table.
Describe
Give an account in words (someone or something) including all relevant characteristics,
qualities or events.
Devise
To plan or create a method, procedure or system.
Discuss
To consider something in detail; examining the different ideas and opinions about
something, for example, to weigh up alternative views.
Explain
To make something clear and easy to understand with reasoning and/or justification.
Identify
Recognise and name.
Justify
Support an argument or conclusion. Prove or show grounds for a decision.
Outline
Give a general description briefly showing the essential features.
Recommend with reasons
Provide reasons in favour.
State
Express main points in brief, clear form.
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