M92 Insurance Business and Finance: Coursework Assignment Report

This document presents a detailed solution to an M92 Insurance Business and Finance coursework assignment. The report addresses various key aspects of the insurance industry, including stakeholder analysis, strategic planning using SWOT analysis, and risk management. It explores the implications of underwriting decisions on stakeholders like shareholders and creditors, and provides recommendations for managing their expectations. The assignment also delves into challenges faced by insurance brokers, such as diversification and employee management, and proposes solutions using tools like the balanced scorecard. Furthermore, the solution outlines the three lines of defense model for risk management and provides practical examples of risk control activities. The assignment solution covers financial and non-financial aspects, providing a holistic overview of insurance business and finance principles.

Running head: M92 INSURANCE BUSINESS AND FINANCE
M92 Insurance Business and Finance
Name of the Student
Name of the University
Author Note

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Table of Contents
Answer to Question 1...................................................................................................................2
Answer to Question 2...................................................................................................................3
Answer to Question 3...................................................................................................................6
Answer to Question 4...................................................................................................................8
Answer to Question 5.................................................................................................................11
Answer to Question 6.................................................................................................................15
Answer to Question 7.................................................................................................................16
Answer to Question 8.................................................................................................................19
Answer to Question 9.................................................................................................................21
Answer to Question 10...............................................................................................................25
References..................................................................................................................................31

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Answer to Question 1
a) Stakeholders can be defined as the people related to a company in some manner that are
affected directly or indirectly by its actions. Some of these stakeholders include the
customers, government, public, employees and the government. Apart from these, there
are also external stakeholders like the creditors, advocates and the people impacted by the
business of the entity (Pérez and López 2015). In the given situation, the case is related to
the underwriter of TFI plc, a commercial insurer. As an insurance underwriter, my
primary job is to ensure that the risks involved in insuring the people and assets are
thoroughly analysed to establish a good pricing level for the accepted insurable risks. In
this process, the needs and priorities of the stakeholders related to the organisation also
need to be taken into consideration. In this situation, as an underwriter, I have decided to
not insure fossil fuel energy companies and instead shift my focus towards renewable
energy companies. Due to this decision, there is a significant chance of the profitability of
the entity being adversely impacted in the short run. Hence, the two most relevant
stakeholders to consider in this regard are the ones who are directly related to the
profitability of the organisation. The two most significant stakeholders that need to be
taken into consideration in this situation are the shareholders and the creditors of the
entity. Their needs are directly dependent on the profit making ability of the entity. The
primary concern of the shareholders is the lack of profits earned by the entity in the short
run. This may result in the lack of payment of dividend in the short term by the entity. It
may also impact the growth in the value of their investments. The creditors will be
concerned about the timely payments of their debts by the company. These are the
aspects that need to be kept in mind at the time of undertaking this strategy.

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b) The primary action that will be taken to manage the expectations of the shareholders in
the short run is through communication in the general meeting of the company (Petronio
2017). The positive aspects of this step like sustainable development and environmental
benefits will all be explained to the shareholders. Even though the profits may decrease in
the short run, the long run benefits of this process will outweigh the benefits foregone in
the present scenario. Hence, an effective communication channel would be maintained to
address the concerns of the shareholders. In order to address the concerns of the creditors,
one set of action that would be implemented by the entity is to provide them an option to
change their credits to secure creditors and also improve the terms of the credit given to
them. Adequate information would be provided to them about the long-term solvency of
the company to ensure them about the priority given by the company to make their
payments (Crane and Livesey 2017). Apart from ensuring the solvency of the company,
this will also play an important role in ensuring the enhancement of the reputation of the
company in the long run.
Answer to Question 2
a) In this particular case, the main issue is related to an entity called CWS plc. It is a
medium sized broker which specialises in providing insurance to large scale international
companies. However, as a part of the aim of the company to diversify its business, it has
undertaken three new businesses in the recent years. However, due to this expansion, a
new set of problems have arisen which are required to be faced by the company. They
include an increase in customer complaints, increased training needs of employees
company wise, a lack of unified strategy reducing the morale of the employees,
differences in pay and bonus scales across the entity and difficulty in accessing sufficient

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number of insurers due to the diversification in portfolio (Bratton and Gold 2017). One
thing which is evident is that the company has already diversified its portfolio and has
entered into a new line of business. The requirements now faced by the company are to
ensure that it overcomes these new challenges successfully and overcomes the challenges
posed by the new line of business. Hence, it can be said that the strategic planning and
management tool undertaken by the company should focus on improving the quality of
the services provided by the company and focus it towards achieving the objectives set
prior to diversification. Hence, the best strategic tool to use in this situation is the SWOT
Analysis. This tool measures the strengths, weaknesses, opportunities and threats faced
by the company as a part of this new measure undertaken by it.
b) The SWOT analysis measures the strengths and weaknesses of the organisation. It also
gives an account of the threats and opportunities faced by the organisation as a part of its
business expansion procedures. The strengths of the organisation are its experience in the
insurance industry and the large number of acquisitions that have been undertaken by the
entity over the years. However, the threats and opportunities suggest the weakness that
are faced by the company over the past few years as a part of conducting its business in
the long run. The most significant challenge faced by the company is to have a portfolio
which has access to all the necessary businesses in the industry. Currently, the company
is unable to balance its portfolio between insuring the large scale companies and also
being in successful in providing insurance to the small scale businesses. This needs to be
overcome by the business to become successful. The other challenge faced by the
company is to create a business strategy which meets the requirements of all the
employees like disparity in pay scales and improving their motivation levels (Barbara et

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al. 2017). The strategy should focus on reducing these disparities while also unifying all
the employees. This also includes meeting the training needs of the employees who are a
part of the organisation. The third challenge faced by the company is to retain customers
while improving the ability of the employees through training. As the training undertaken
by the employees does not immediately result in an improvement in their performances,
the company needs to ensure that it does not lose out on consumers during the time in
which it tries to improve the quality of the services provided by it (Pradhan and Pradhan).
The fourth challenge faced by CWS is to overcome its weaknesses like the lack of
experience in dealing with individual consumers and facing the competition in the area of
providing insurance to small scale consumers. As a relative newcomer in the industry, the
company should focus on improving its business practices to establish a business for
itself in the insurance market without losing focus on the already established business of
providing insurance to firms of international scale.
c) The primary challenge can be overcome by conducting a thorough analysis of the
established businesses in providing insurances to individual consumers. Some of the parts
of their business practices which can be classified as essential should be undertaken by
the business as a part of its strategy. Expert training should be given to the employees to
ensure that they become well equipped to meet the requirements of individual consumers
while also improving the overall quality of the services provided by them. A balanced
scorecard can be implemented by the organisation to ensure that the new strategy meets
both the financial and non-financial needs of the organisation in the long run (Hansen and
Schaltegger 2016). All the employees should meet the requirements of the organisation
both financially and non-financially. This makes sure that the organisation becomes

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unified and all the employees hired by it work towards the achievement of a common
goal. The final challenge of the company can be overcome by focusing its resources and
strategies on balancing its business priorities between both the insurance provided to
international businesses and the priorities and preferences of individual consumers.
Additional priority should not be given to either of the businesses undertaken by the
entity. This ensures a stability amongst the internal aspects of the business and there will
be a better unification of the business procedures undertaken by the entity (Mwega 2016).
Answer to Question 3
a) In any business related to the insurance industry or otherwise, organisations tend to adopt
the three lines of business model to protect the business from the risks faced by it in the
long run (Mabwe, Ring and Webb 2017). The first line of business which can be taken by
the business is the managers of the entity who have a direct relationship with the control
of risk. As these managers are tasked with the responsibility of overseeing the business
procedures undertaken by the entity, they should ensure that there is no leak of data
related to the customers by improving the security measures undertaken by the entity.
Implementation of new technology should also be taken by the entity to improve the
monitoring of the business on a geographical level (Klapkiv and Klapkiv 2017). This
ensures that the business becomes more secure on a basic level as the managers deal
directly with most of the employees working in the organisation. The second line of
defence is the people working in the risk management, compliance and specialist
functions. The IT specialists should be charged with the responsibility of improving the
security of the IT systems of the entity and also in bringing new technology which
monitors the business worldwide (Camillo 2017). Similarly, the insurance based experts

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should undertake the responsibility of ensuring that the underwriters do not enter into
illegal contracts or sign contracts with unfair terms. Similarly, the financial experts
should be charged with analysing the reasons for the lack of improvement in the financial
performance of the entity and suggest measures and investment avenues to improve the
overall performance. The internal audit team should be responsible for having proper
internal control mechanisms as a part of the business undertaken by the entity. These
teams are responsible with maintaining appropriate records for the transactions
undertaken by the entity and also with the responsibility of avoiding any mismanagement
of documents internally. These lines of defence should be strictly implemented to make
sure that there are no problems caused to the entity (Elamer et al. 2018).
b) The risk management control activity which can be undertaken by JDB Ltd. to overcome
the risks posed by the problems identified during the internal audit procedures are as
follows:
 The IT team should be charged with the responsibility of identifying the new
technology which is essential for monitoring the geographical aggregation by the
entity. It enables the business to expand the place of its business.
 Reinsurance on the most significant risks faced by the entity should be undertaken
on the basis of the advice provided by the credit risk managers (Gu, Viens and Yi
2017). Hence, the risks faced due to unforeseen losses can be overcome by the
entity;
 The underwriting authorities should be subject to internal audit on a regular basis.
This ensures that they do not misuse the powers vested on them by the authorities;

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 The IT team should be briefed with the process of improving the security in
relation to areas which are related to the protection of the consumers. This ensures
that the privacy of the consumers and the data of the company are maintained
successfully;
 The accounting team should be charged with the responsibility of identifying the
reasons for the lack of returns on the investment opportunities undertaken by the
entity. These reasons should then be used in the identification and analysis of the
new investment opportunities which become available to the entity. This will
result in the entity making more profitable investments in the future (Teichgraeber
and Brandt 2017 November).
Answer to Question 4
a) In the given situation, WP Ltd. is conducting its business as a commercial combined
insurer. The insurance policy that has been provided for analysis is related to the
insurance scheme for fast food restaurants. This policy consists of a varied range of items
like fixtures and fittings, buildings, employer’s liability and public liability. The scheme
is currently operating on a flat rate basis and is charged on the basis of per location. The
underwriting terms for a scheme need to be written on the basis of the companies for
which insurance is being provided. To establish the risk premium for this particular
scheme, there are a varied set of factors which need to be taken into consideration. These
factors are as follows:
 Historical data of related to the fast food restaurants should be taken into
consideration. This enables the underwriter to understand the risks which are
faced by the companies operating in the restaurant business and the likelihood of

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the occurrence of the insurance related problems in their cases. The statistical
analysis of the past claims from restaurant businesses and the amount of payment
made to them should all be considered in establishing the pure risk premium for
this particular scheme (Besman et al. 2017).
 Ownership structure and the methods of conducting businesses in case of most of
the modern day entities are required to be taken into consideration. This provides
reliable information about the risks faced by the restaurant businesses and the
likelihood of them going bankrupt in the future (Firdaus and Kusumastuti 2015).
If the restaurant business is heavily debt oriented or too dependent on obtaining
funds from external sources, then the risks occurring due to the default of the
payments are likely to be higher. Hence, the entity should avoid the same;
 Financial condition of most of the restaurant businesses operating in the industry
should be taken into consideration. This is done by measuring important ratios by
the entities like the analysis of balance sheets, profit and loss statements and the
ratio analysis of the various entities operating in the industry (Andjelic and Vesic
2017). Some of the ratios which can be measured by the underwriter to obtain a
better understanding of the condition of the business include the current ratio,
debt-to-equity ratio, interest coverage and profit margins of the businesses;
 The quality of the management employed by most of the entities should be
considered. A more responsible management is likely to operate in a manner
which is less risky and more focused on achieving the goals of the organisation
(Mackay, Mostert and Petzer 2015). Similarly, the quality of the management also
affects the quality of the business practices undertaken by the entity. A poor

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quality management will put unnecessary pressure on the creditors and employees
to take unethical measures which will adversely impact the business.
 International risks for restaurants operating on a global scale need to be taken into
consideration. If a restaurant has branches worldwide, then its business is likely to
be impacted in an adverse manner due to the troubles occurring outside of the
country (Giambona, Graham and Harvey 2017). Hence, they need to be taken into
consideration to ensure that the business is not adversely impacted by some
external factors which may not exist at all times when the entity conducts its
business.
b) One of the most prominent insurance-related function is that of an underwriter. The main
function of an underwriter is to accept or reject risks by thoroughly evaluating them and
analysing them. The underwriter can select the risk that the entity should take on the basis
of various date which are available to him at a given point of time. Hence, in order to
understand the same, the underwriter should make a note of the data which is available in
relation to a restaurant (Cao, Chen and Wang 2015). Based on the information provided
by the clients and an analysis of the claims undertaken by them, the restaurant businesses
can be classified as high risk, moderately risky or low risk. Apart from this data related to
the reinsurance and retention of various restaurant based businesses should be taken into
consideration. If there is a high rate of retention in the previous years, it means that the
business is less likely to default in terms of payment of insurance premiums. It also
means that the payouts made to such companies have been lower over a particular period
of time. Hence, utilising the tools available with them, the underwriters can successfully
measure and classify the risk profile of a company and the industry in which they are

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operating. These factors help WP Ltd. in setting up an accurate pure risk premium for an
insurance policy (Keller et al. 2018). Similarly, another insurance-related function which
will help in this aspect is the investment function. The investment function will analyse
the risk profile of an investment opportunity on the basis of the expected rate of return.
Apart from correctly calculating the risk profile of an investment opportunity, it also
calculates the benefits that would be available to the company (Roll et al. 2015). If the
risk of the investment opportunity is high, then the pure risk premium taken from the
investment opportunity would also be high. Hence, the investment functions plays a
critical role in understanding the profitability of the insurance scheme and set up the risk
premium accordingly.
Answer to Question 5
a) In this situation, as a Claims manager for AVS Ltd., the main purpose is to evaluate the
potential long-term relationship with a Third Party Administrator (TPA). The duty of this
TPA is to handle all personal claims whose value is below £5000 in value. However,
before entering into a contract with the TPA, there are a few issues which need
investigation to be able to determine whether entering into a contract with the entity
would be profitable or not. They are as follows:
 Decline in the staff retention rates: When compared to 2017, the staff retention rates of
the entity have come down from 89.2% to 81% in 2018. This is an indicator of the
reduction in the employees who have joined the business in the current year. This is an
indication of the increased losses by the company as companies tend to cut the jobs of the
employees to reduce the losses incurred by them as a part of the other business activities
undertaken by them (Cloutier et al. 2015). It also suggests that the entity is also not able

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to meet the requirements of its employees in terms of security, job satisfaction and the
social needs. Retaining the employees’ results in an increased savings in the costs
incurred by the company in hiring new employees as a part of their organisation. It also
enables the entity to have a better reputation in the market about the entity being a good
employer and also focusing on the needs of the employees. In some situations, it may
also happen that the entity is unable to retain its employees due to a decline in the
performance of the business as a whole. Hence, this may negatively impact the
perception of the investors about the entity (Haider et al. 2015). Hence, this also needs to
be taken into consideration.
 Reasons for the significant reduction in the customer complaints: While it is a good
thing to reduce the number of customer complaints received by the entity, it is also
necessary to analyse the reasons for the same. It may either occur due to the improvement
in the efficiency of the company or due to the reduction in the overall customer base of
the company (Kaura, Prasad and Sharma 2015). A decline in the reduction of the overall
customer base suggests that the entity is not able to maintain the previous levels of
business and has started to decline in terms of the efficiency of its performance. This
suggests that appointing it as a TPA will result in a reduction in the performance levels of
the entity. Hence, before making decision about the appointment of the entity, an
investigation should be conducted about the nature of the customer base of the entity and
the reasons for their decline in the current financial year (Ngo and Nguyen 2016).
 Causes of a lack of increase in the staff salaries over the years: The lack of the
increase in the salaries could be the primary reason behind the failure of the company to
retain its employees. It may be caused due to a variety of reasons like the lack of profits

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earned by the company. It may also have occurred due to the investment of the profits in
new areas of business. The increase in the income earned from fees also suggests that the
entity has been successfully improve the efficiency of its operations (Phadermrod
Crowder and Wills 2019). However, the inability to retain employees tends to offset the
benefits occurred due to the retention of the employees. Hence, it becomes essential to
understand the role of the employees in the organisation and the failure of the entity to
maintain continuity in the operations undertaken by it.
 Increase in average claim settlement cost: The increase in the average settlement costs
of the entity suggests an increase in the accidents and the risks undertaken by the entity.
This indicates that the entity is willing to take uncalculated and insignificant risks in
order to be able to improve the reach of its business. While it may result in the increase in
the revenue levels of the company, it tends to be set off by the increased cost of claims
incurred by the entity (Aase 2017). Hence, the business strategy of the entity needs to be
thoroughly analysed to understand the impact of the increased costs incurred by the entity
on its business’ profitability. The risk taking ability and the willingness of the entity both
need to be taken into consideration to understand the impact of appointing it as a TPA
(Power and Power 2015, May).
 Causes for the improvement in efficiency of the company and the measures
undertaken to improve in the future: It is evident that the entity has been able to collect
more fees income in 2018 than in 2017. However, the causes for the same have not been
known. This needs to be analysed to be able to classify it as either an improvement in the
efficiency of the business or a significant reinvestment of the profits earned by the entity.
The analysis suggests that the entity is not able to increase the salaries of the employees

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or significantly reduce the other costs incurred by it (Lo Surdo 2016). The initial analysis
suggests that the business model of the entity may not be profitable in the long run and
also raises questions related to its efficiency in the long run. Therefore, any appointment
in this regard needs to be dealt with caution.
b) The other factors which need to be taken into consideration while appointing a TPA
which are not directly related to the information mentioned but are essential are as
follows:
 Cost: One of the questions that arises in relation to the TPA is its ability to reduce the
overall costs incurred by the company. While the TPA has increased the overall costs
incurred by it in 2018, it may not be the case while operating on behalf of the
company. Hence, the company should thoroughly consider the cost model suggested
by it and the items which need to be taken into consideration (Sahani 2016). The
various services which are provided by the entity and their cost pattern should also
be taken into consideration to make a clear decision about its appointment.
 Financial Guarantees: The financial performance of the entity in a given financial
year and the capital available with it should all be taken into consideration in a given
financial year. The minimum business that the TPA will be able to generate should
be provided in advance to the entity. Similarly, other guarantees need to be provided
about the manner in which the funds will be made available and whether the TPA
can be able to repay them in a given financial year or not (Schwarcz 2015).
 Debt of the business: Important ratio analysis can be conducted only on the basis of
availability of the information like the level of debt employed by the company and its
overall capital structure. Excess debt applied by the company as a part of its business

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results in the increased risk of default in payment and bankruptcy of the company.
Hence, the information about the overall capital employed by the company and
whether the level of debt employed by the company is excess also needs to be taken
into consideration (Bouakez, Oikonomou and Priftis 2018).
 Net Profit of the business: While it is important to understand the overall revenue
earned by the business, it is also essential to understand whether the business is able
to recover the costs incurred by it. This will only be available through knowing the
net profits earned by the entity in a given financial year. It is also an indicator of the
efficiency levels in which the company is conducting its business (Bikker 2017).
Hence, the gross profits and net profits earned by the entity are essential to
understand its financial performance in a given financial year.
 Return on Investment: The rate of returns that the entity is able to generate on the
investments undertaken by it in a given financial year is also essential. The rate of
returns are the ultimate measure of the final profitability of an entity for a particular
period. The net profits are a relative term and they provide a clearer picture only
when measured in relation to the funds invested by the business as a part of the
business. The trends of the business in terms of ROI also state whether it has been
continuing as a profit making entity or a loss making one. Hence, the ROI is another
important item which needs to be provided by the entity as a part of its financial
information (Savo 2017).
Answer to Question 6
The situation here is related to the commercial liability account of OMM Ltd. The
analysis has been conducted on the claims reserving policy for the commercial liability account

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and the trends that were observed in relation to this account. The trends that have been observed
in this situation are the higher costs of settlement in relation to the commercial liability claims
and a sudden drop in the frequency of the reported claims. The trend which can be observed in
this situation is that there may be a reduction in the efficiency levels of the company (Yusuf,
Ajemunigbohun and Alli 2017). The failure of the company to close a claim in the correct time
period results in the decline in the overall reduction in the profits earned by the company. It also
suggests that the company is unable to close a claim in a quick manner. This also adversely
affects the other business prospects of the company. Similarly, another aspect which is adversely
impacted in this situation is the investment funds available with the company. They cannot be
used for other productive purposes and the profits generated by the business is also not used
appropriately. However, one of the benefits that the entity is going through is the reduction in the
average number of claims faced by the entity. The increase in the costs of the claims are offset
by the decline in the number of claims. This indicates that the company has become better
equipped in identifying the claims which are less prone to risks and hence needs to work towards
increasing these kind of customers. On an overall basis, the analysis of the situation suggests that
the entity has become better in identification of consumers who are less likely to face the risks of
claiming insurance from the company. However, the downside faced by the company in this case
is that it is unable to efficiently and swiftly settle the insurance claims which it is receiving as a
part of the business. Hence, the business needs to work towards reducing the costs involved in
settling the claims to obtain the benefits given by the reduction in the average number of claims
as a part of its business (Johnson, Sachs and Sachs 2015).
Answer to Question 7
a) Analysis using financial ratios

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Particulars Formula Amount
Gross Profit 25000
Revenue 130000
Gross Profit Ratio Gross Profit/Sales *100 19.23%
Current Assets 13000
Current Liabilities 3000
Current Ratio Current Assets/Current Liabilities 4.33333
Debtors 7000
Sales Turnover 130000
Debtors Collection
Period
Debtors/Sales Turnover *365 19.6538
Sales 130000
Debtors 7000
Debtor Turnover
Ratio
Sales/ Debtors 18.5714
On the basis of the above ratios calculated, various aspects of the company like its
profitability, liquidity, efficiency and activity have all been calculated for financial year 2018.
The gross profit ratio suggests that the entity is able to recover all the costs incurred by it in
selling the products. This means that prior to incurring the administrative and non-sale related
costs, the company is able to successfully earn profits based on the costs incurred in disposing of
the available products (Robinson 2020). Hence, it becomes essential for the entity to make sure
that it recovers the additional costs incurred by it. Similarly, the current ratio of the entity is more

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than one. Any situation where the current ratio of an entity is greater than indicates that it is
successfully able to pay its short term obligations with the short term assets available to it.
However, this suggests that the company can undertake more risk by using more short term
liabilities as a part of the business. The debtors collection period suggests that the company takes
an average of 18 days to make collections from the customers to whom credit sales are being
made. The lower time period is an indicator of greater efficiency on the part of the company and
the company should work towards lowering the time period incurred in recovering its debts. An
increase in the debtors collection period indicates that the entity is unable to collect its debts at a
quicker notice and needs to improve itself more (Koijen and Yogo 2015). Debtors turnover,
although similar to the debtors collection period, is an indicator of the number of times the
debtors are turned in a particular year. It is similar to the aspect of suggesting that the debtors
were turned three times in a month or 10 times a year. A high turnover indicates that the
company’s turnover system is efficient while the lower turnover is an indication of the lower
efficiency on the part of the receivables system of the entity. The company should work towards
increasing the annual turnover of its accounts receivable (Miranda-Agrippino and Rey 2015).
b) The insurance broker has provided with the financial information related to the entity.
Although it is quite useful within itself, the statements of financial position of an entity
cannot be completely used as the sole method of analysing its performance. Hence, it
becomes necessary to measure the performance of the same through the use of other tools
like ratio analysis. One of the concerns which is evident from the ratio analysis of the
entity is the extremely high current ratio of the entity. A current ratio of more than 1 is an
indicator of a healthy business model and it can be suggested that the business model of
the entity is profitable (Ulzanah and Murtaqi 2015). However, when the current ratio

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becomes more than 2, it means that the current liabilities of the entity are extremely low
in comparison to the current assets of the entity. It means that the assets of the entity may
not be put to good use by the entity. It also signifies a low risk taking ability on the part
of the entity. This reduces the short term profitability of the entity while rendering its
assets unproductive. The company can earn a higher level of profits by improving its
performance in the short run. There are concerns about some of the aspects which are not
clearly stated in the books of accounts of the entity. One of them is the stating of the
machinery in the current assets of the balance sheet. Machinery is generally a long-term
asset and should be stated in the non-current assets section of the balance sheet. Hence, it
can be stated that the financial statements of the entity have not been prepared in the
correct manner. There is a concern about the preparation of the financial statements and
the authenticity and dependability of the information communicated by them for the
period for which they were prepared (Robinson 2020).
Answer to Question 8
a) One of the risks that the company faces by the non-payment of dividends is risking the
funds held back as a part of the business. If an entity does not pay its dividends in a given
financial year, it implies that it is looking to plough back the funds to undertake new
investment opportunities as a part of the business. However, these investment
opportunities tend to be varying in nature. They may either be invested in acquiring new
assets or in the process of merger or acquisition of a new business. The issue with these
investments is the asset or the M&A deal failing to produce the required level of returns
(Ashraf and Zheng 2015). Such failure results in the entity not being able to maximise the
wealth of the shareholders and also adversely impact the value of their investments.

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Hence, it becomes extremely difficult for the entities to satisfy or meet the expectations
of the shareholders in the long run. Another risk faced by the entity is the risking of its
reputation amongst the shareholders who expected dividend payments as a form of return
on the stocks. In these cases, the failure of a company in paying its dividends adversely
impacts its reputation amongst the shareholders. Hence, the reputation of the company as
an attractive investment avenue reduces among the shareholders who expect the payment
of dividends on their share values. Hence, the company faces the risk of isolating a
section of shareholders who expect significant returns on the value of the stocks owned
by them or are looking to invest in the company on the basis of the dividends paid by it
(Tabari and Shirazi 2015).
b) One of the options that the company can consider in the payment of dividends in the
future is the aspect of full disclosure. The company should try to clearly state the
dividends that it will pay in the future. In this disclosure, it should also state the reasons
for which it had cut the dividend in the past and the time from when it expects to continue
the normal repayment of dividends. It should also state the impact that the dividend cut
had on the overall profit levels of the business of the entity and the changes it expects to
be brought by the renewed payments of the dividends by the entity. Similarly, the manner
in which the dividends will be paid to the shareholders also need to be taken into
consideration. The company can choose to make the payments either in the form of
interim dividends or final dividends paid at the end of the year (Byrne and O’Connor
2017). These payments are done on the basis of the funds available with the entity and
the payments that the business is able to make without hampering other investment
opportunities available to it. Hence, after taking both the factors into consideration, the

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entity decides whether it can pay the dividends for a particular period or not. The date
and the amount of dividends that would be paid by the entity should also be decided in
advance.
Answer to Question 9
a) As a financial director of a reputed entity, it is essential to determine whether the entity
has been performing well over the given period for which the financial statements of the
entity have been prepared. Hence, using the income statement and the balance sheet of
the entity, it becomes necessary to determine whether the entity will be able to sustain
itself in the long run or not. It also becomes important to suggest the areas in which the
entity can improve its performance to sustain itself in the long run. After analysing the
financial statements, the five significant challenges faced by DF plc are as follows:
 Negative profits earned by the entity: While the operating profit earned by the entity
is positive, the finance costs incurred by the same are exceeding its operating profit in
the given financial year. Finance costs incurred by an entity are the costs spent by it
in aspects like interest and other borrowing costs incurred in purchasing or building
an asset or conducting the business successfully. Some of the examples of the
borrowing costs incurred by an entity in a period of time include the interest on loans,
overdraft charges and the mortgage payments made in relation to an asset (Easton and
Sommers 2018). This is one of the aspects which will negatively impact the business
of the entity in the long run. Lack of net profits makes the entity devoid of new
sources of funds for investment internally. Hence, it becomes necessary to reduce the
finance costs incurred by the entity and also improve the efficiency of the business.
The salaries and office costs incurred by the entity are also very high when compared

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to the net revenue generated by the entity. Hence, focus should be increased towards
improving the operating profits of the company initially and the net profit of the
entity in turn.
 Current Ratio lower than one: The current assets of the company are lower than the
current liabilities owned by it. This means that the entity will not be able to meet its
current obligations using the current assets available to it. In case of any sudden
obligations arising as a part of the business, the entity will be unable to meet the
same. This means that the liquidity position of the entity in the given financial year is
not good. It needs to be improved in the short run to ensure that the entity remains
sustainable in the short run. It also enables the company to take loans from the banks
and also repay them in a timely manner. A current ratio of lower than one indicates
that the entity finds it difficult to balance between meeting its short term obligations
and conducting the business profitably. Hence, this ratio needs to be improved in the
current financial year.
 Repayment to Insurance broking creditors: The loans taken from the creditors as a
part of the business is very high. However, as these are mandatory obligations, they
need to be met by the business on a priority business. These aspects severely hamper
the ability of the business to remain profitable in the long run as the profits earned by
the business cannot be used as a part of the funds required for reinvestment. Hence, it
becomes necessary to address the loans undertaken by the business as a part of
conducting its business. If a business is unable to pay its obligations, it damages the
credit reputation of the business amongst the insurance brokers while also adversely
impacting the funds in the form of finances. Any fluctuations in the interest rates

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incurred by the entity negatively impacts the finance costs payable by the entity.
Hence, a check needs to be kept on the credit taken by the entity as a part of its
business (Schroeder, Clark and Cathey 2019).
 High amounts of trade receivables: While trade receivables impact the assets side of
the balance sheet positively, they also have a negative impact on the operational
ability of the business. This is because the funds kept with the debtors cannot be used
as an investment in the business. Funds which are received on a future date and not
the current date are lower in value because of the concept of time value of money.
Hence, the receivables mechanism of the entity needs to be improved to ensure that
the funds become readily to be able to invest the same as a part of the business
(Raychaudhuri and De 2016). The receivables mechanism of the business and the
debtors turnover of the business needs to be improved to benefit from the revenue and
profits generated by the business.
 Excess usage of current liabilities: In comparison to the equity levels of the company,
the short term debts used by the company are extremely high in nature. This suggests
that the entity is unable to maintain a healthy balance between the level of debt and
the level of equity employed by it (Lennox and Kausar 2017). It should work on
improving the efficiency of the business by employing more equity and reducing the
dependence on the debt funds.
b) As the entity is suffering from the concerns identified above, the steps which are taken as
a part of rectifying them should broadly focus on improving the quality of the business
and its efficiency as a whole. Some of the measures which can be taken to address the
identified concerns are as follows:

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 Improving the operating profit of the company: In order to do so, the company should
focus on generating more revenues as a part of its business operations. This can be
done by undertaking more investment avenues which are available to the entity
without compromising the operational nature of the entity. This also provides long
term stability and improves the liquidity of the business (Bustinza et al. 2015).
 Reduction of current liabilities: The current liabilities used by the business are
extremely high in comparison to the current assets owned by the company. This needs
to be improved by decreasing the current liabilities used as a part of the business
while also improving the current assets owned by the business. This provides two
benefits to the business. While it improves the liquidity position of the business, it
also reduces the dependence of the entity on the short term debts. This reduces the
bankruptcy risk of the business. Hence, the business needs to employ more assets to
improve its stability (Medina 2020).
 Collection mechanism: The accounts receivable mechanism of the business needs to
become more efficient to ensure that the funds struck with the debtors are collected in
a swift and efficient manner. It also improves the value of the money available with
the business which can be used as a part of the business activities. There is also a
reduction in the risk faced by the entity due to default by the debtors (Adusei 2017).
All these benefits can be availed through the quicker collection of funds by the
business.
 Reducing the insurance brokerage creditors: In a similar manner to the current
liabilities, the long term liabilities of the entity also need to be repaid to benefit the
business in the long run. This provides the business with an opportunity to grow

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organically without being severely affected by the fluctuations occurring in the debt
market. In case of foreign funds taken by the entity, there is a need to reduce the
dependence on the funds so that there is no adverse impact of the foreign exchange
fluctuations on the market (Anuonye 2015).
 Positive profits in both short and long run: The entity should improve its profitability
in both the short run and the long run. This is because profits generate a source of risk
free investment and also help in the internal and organic growth of the entity. Hence,
these need to be kept in mind to reduce the costs incurred by the entity. The
profitability of the entity can be improved by undertaking a strategic cost reduction of
the costs incurred by the entity. These involve the usage of techniques like budgetary
control, standard costing and the value analysis of the process undertaken by the
entity. These processes are necessary in reducing the overall costs incurred as a part
of the business process while also enabling the business to meet its obligations
without facing any risks (Moradi 2015).
Answer to Question 10
Overview of the Case
Yellow plc is an insurer company which is formed by the merger of two companies CH plc and
TZ plc. The product mix and customer of both the companies are similar however, their
management style are different within the companies. CH plc follows autocratic culture where
the management strictly controls the team and there is top-down budgeting in the company. On
the other, TZ plc follows democratic culture and therefore uses bottom-up planning and has
flexible work environment. Yellow plc board aims at implementing a new strategy which would

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be focusing on product development in order to increase the market share and whilst increasing
the productivity as well.
Being the Financial Director in order to optimize the respective strength of both the companies a
workplace audit has to be formed so as to identify a satisfactory and effective management style
for the company.
The four significant challenges for Yellow plc in implementing this new strategy are:
Organizational culture:
It is observed that both the companies before merger followed totally different type of
management style and culture and the employees were adopted to that kind of culture. The CH
plc follows autocratic management style and TZ plc follows democratic management style, the
employees would face difficulties in accepting the new kind of environment and management
style. The employees of CH plc were habituated to an environment which follows strict rules and
there is a controlled hierarchy (Jain 2015). The employees used to different shared values and
beliefs, they were adapted in an environment where they follow and oblige by the commands of
their seniors and work accordingly. There was no freedom of speech and they used to do what
their seniors tell them to do. On the other hand the working environment of TZ plc is very
friendly and the employees have the right to speak and foster creativity and innovativeness in the
organization. There is flexible timing and facility such as work from home. The company
believes having such an environment would let the employees to think better and create more
opportunities. The difference in culture of both the companies could bring difference in the work
process, values, beliefs and productivity of the organization as well.
Employee Retention challenges

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The most common challenges which is faced by the companies after merger is employee
retention. It is evident that after merger, the companies’ first attempt is employee mass lay-off.
They believe that merger is a good opportunity for the companies but however, it is a threat for
the employees. Therefore, it is observed that the employees reign from the company and go in
search for other better opportunities. Moreover, the reason of employee lay-off is due to job
security and incapable of adjust with the new environment. The employees who are not flexible
enough are not capable of sustaining in the new environment and therefore leave the company.
This is a huge challenge for the management to retain the employees.
Communication Challenges
According to a survey which was conducted in a renowned company that is PWC that
during mergers the most potential challenge is communication. It is observed that the company
CH plc has been working together for ten years and there have created a bonding and connection
within the whole organization. On the other hand the company TZ plc has been working together
for five years and he working environment is friendly and flexible. There can be communication
gap between the employees and employers. Communicating with the employees motivating and
influencing them is the most important part of the organization and which is a fundamental part6
of the integration (Genç 2017).
Conflicts and Disputes
When there is merger, the main challenge is faced by the employers. When there is
incompatibility in the action and words and with the decisions taken conflicts may rise (Cooper
et al. 2019). It becomes very difficult for the managers to make things clear with a whole new
organization and employees. When there is a communication gap, the possibility of conflict and

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M92 INSURANCE BUSINESS AND FINANCE
dispute is high and moreover, there are situations where the opinions and ideas mismatch within
the employers (Hastings, Kavookjian and Ekong 2019). Conflict arises mainly between the
managers and the higher management.
Possible Solution for the Challenges
Cultural Challenges:
When the organization fails to promote effective organizational culture during merger the
following solutions would be beneficial. It is known that culture is a share value and belief that
keeps the whole organization intact and influence the behavior and attitude in an organization.
The management could opt for a survey and get feedback from all the employees. For example:
there should be questions like “There must be work from home in the organization”. The
management should gain feedback and must take appropriate action to structure their culture as
per the requirement of the employees and which best fits the working operation of the
organization. The organization should focus on clear communication and give priority to each
and every member who is a part of the organization.
Employee Retention Challenges:
In order to overcome this challenge, the management will have to motivate the employees and
gain trust within the employees. When the companies choose to form merger the management
must ensure that the employees are well-aware of the reason of merger and the benefits they will
be getting form the merger. The management needs to be transparent and provide attractive
benefits to the employees in order to retain the employees. The salary and other benefits must be
competitive. The organization must ensure leaders and not bosses.
Communication challenges

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M92 INSURANCE BUSINESS AND FINANCE
The communication challenge is the most important thing which should be managed by
the management. The management must use the right type of communication tools and must
train the employees on having effective communication. The basic communication tools which
could be used by the management are employee directory, group chat, suggestion box, social
messages and survey. The management must have the right software to support all the channels
and internal communication. The employees must be trained on emotional intelligence as well.
The emotional intelligence will provoke the employees to understand others and themselves as
well. The employees must be trained not to mix their personal and work related communication.
The personal communication might lead to conflict and disrupt professionalism as well. The
management must ensure that the employees should have the right to speak and share their voice
with the management. The use of technology has always been a boon to the organization, the
Connecteam helps the management to create suggestion box and share their thoughts.
Conflicts and Disputes
The conflicts could be solved when the management could provide close attention to the
details and respect the ideas and opinion of other members in the organization. The organization
should focus on maintaining organizational hierarchy and respect each other in the organization.
When there is a dispute the management must focus on taking some disciplinary actions and
must emphasize interest and awards as well. Establishing common goals, when there is merger
the managers must establish common goals to achieve their target, this would help them to focus
on one particular thing. The senior management should aim at promoting the best way to resolve
a conflict and find barriers to the common goal. Ignoring conflict is the worst way to resolve a
conflict there the time a conflict arises the management should focus on resolving the conflict as
soon as possible.

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M92 INSURANCE BUSINESS AND FINANCE
Most effective management style
According to the case the most effective management style is democratic style. There is no doubt
that CH plc has been consistently producing profitable result for last ten years however, TZ plc is
marked as the market leader in product development. It can be said that autocratic leadership
helps getting the work done but democratic leadership leads to productivity and helps the
company to emerge as the most innovative and creative company. Therefore, the management
style which would best suit the company Yellow plc is democratic management style (Iqbal,
Anwar and Haider 2015). The democratic management style would help the managers to
motivate and influence the employees to foster innovativeness and creativeness in the
organization. It has been proven that the democratic management style helps the employees to
build a friendly environment and work within balance. This management style helps the
managers to get best out of the employees. As the company deals with developing new product
and promote new strategy, democratic leadership style helps the employees to give their own
ideas and opinions. The democratic management style believes working in group contribution. It
might so happen that single individual may not have the necessary knowledge, skills or expertise
but in the same time a group of employees can come up with many ideas, opinions and views.
Apart from these, there are certain areas where the management ha to reflect autocratic
management style, when the employees are unable to deliver the required target or what is
expected from them. In this type of situation, the management needs to take appropriate decision
which might not be in favour of the employees. There should be a mix management style in the
organization which would keep a balance within the workplace.

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M92 INSURANCE BUSINESS AND FINANCE
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