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UNIVERSITY EXAMINATIONS
January 2023
RSK4801
OPERATIONAL RISK MANAGEMENT
100 marks
STUDENT NUMBER
INSTRUCTIONS
This online assessment consists of 24 pages. Please read the Invigilator app instructions
below and scan the QR code.
This paper comprises two sections:
Section A consists of six (6) questions based on a case study.
Section B consists of three (3) essay-type questions.
Write your answers in the designated spaces below the questions, or answer the questions in a Word
document and number your answers correctly.
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Open Rubric
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SECTION A
[75]
Instructions:
Consider the following case study and then answer ALL the questions related to it.
CASE STUDY
Cape Agulhas is a small coastal town situated at the southern tip of Africa. It is a
popular holiday area with several holiday homes and beach houses. The
camping/caravan park, situated close to the sea (about 20 metres from the highwater mark), belongs to the local municipality. It has been neglected and has
therefore failed to attract holidaymakers, so it is currently not a successful business
enterprise.
Mr Khoza, a local entrepreneur, negotiated with the municipality to hire the
camping/caravan park so that he could upgrade the facilities and manage them as a
profitable business. The municipality agreed to rent the park to Mr Khoza for
R30 000 per month. This amount includes the supply of fresh water but excludes
electricity usage.
An analysis of the business revealed the following:
•
The camping ground is divided into 100 stands, with a water tap and an
electrical box on each stand.
•
There is one ablution block suitable for 100 people at a time (50 males and 50
females).
•
There is one laundry area with ten heavy-duty washing machines and ten
wash basins with washing lines.
•
There is one access gate. The fencing around the park is not secure, and it
allows easy access to the park without using the main entrance gate.
•
Mr Khoza employed the following staff:
o four administrative workers at a salary of R480 000 per annum
(R10 000 per staff member per month). They are responsible for the
following tasks:
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
coordinating reservations

ensuring the collection of payments and regular depositing of
monies received

dealing with enquiries

managing and coordinating the park's mini-shop, which sells
firewood for campfires

coordinating the maintenance staff for the maintenance of the
ablution block and the camping grounds
o five maintenance staff, employed at R7 000 per staff member per
month, comprising three cleaners and two groundskeepers
•
There is also a small function hall that can be rented out for
functions/workshops and can host about 100 delegates at a time. Currently,
the hall is used for about 30 weekends per year. It is rented out for R1 000 per
weekend. The park has the potential to be fully occupied during thirty
weekends (60 days) and the school holidays in March/April (20 days), and the
summer holidays in December/January (30 days).
•
Each stand is rented out for R500 per day. During off-peak seasons, the
stands are 10% booked for an average of 200 days in the year at a rate of
R300 per day. Each year, Mr Khoza purchases 1 200 bundles of firewood at
R20 a bundle and sells each bundle to the campers for R50.
•
A major concern for Mr Khoza is the threat of fire. Being a coastal town, the
wind speed can reach up to 50 knots, regarded as a gale force that could
cause an uncontrollable fire. Consequently, Mr Khoza has insured the park
against fire for R1m, at a monthly premium of R10 000. Another problem is
the vulnerability of campers/caravaners to theft. Owing to the location of the
camping ground, there is an increasing incidence of theft and burglary.
However, a clause in the camp rules, which must be signed by each
client/visitor, states that the park’s management is not responsible for any
losses due to theft or natural causes. There is also a clause that states that
the park’s management is not responsible for any losses suffered by campers
because of the unavailability of the park due to unforeseen natural causes
(fires, floods, etc.). However, Mr Khoza has the responsibility to pay for his
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expenses for a period of three months should the park be unable to generate
any income. Therefore, Mr Khosa should ensure that he is able to cover this
potential expense in the event of a potential loss of business. In this regard,
he decided to take out an additional insurance policy of R1m at a premium of
R10 000 pm.
•
Further analysis indicated that the average value of current assets present on
one occupied camping site at a time is R1 000 000. This amount includes, for
example, a caravan, camping equipment and vehicles. Sometimes there is
more than one vehicle parked on a camping site, which should be prohibited
because it takes up unnecessary space and increases the risk of loss, should
a fire occur. Accordingly, when the park is fully occupied, the total value of the
risk for clients is R100m. To cover these assets of campers against any
losses, Mr Khosa is considering "transferring" the risk to a 3rd party in the
future by taking out an additional insurance policy of R1m at a premium of
R10 000 pm. A summary of the monthly expenses is reflected in table 1, and
the total value of the assets is shown in Table 2 below.
Table 1: Monthly expenses
#
Expenditure
Value
1
Average electricity bill
R120 000
2
Rent
R30 000
3
Salaries: Office administrators
R40 000
4
Salaries: Cleaning staff
R21 000
5
Salaries: Groundskeepers
R14 000
6
General maintenance of equipment and vehicles
R80 000
7
Bank loan instalment
R80 000
8
General expenses
R10 000
9
Purchasing of firewood (100 bundles @ R20)
R2 000
10
Insurance premiums against loss of business, fire and theft
R20 000
Total per month
R417 000
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Table 2: Value of assets
#
Asset
Value
1
Washing machines
R80 000
2
1 small vehicle
R120 000
3
Lawnmowers and gardening equipment
R150 000
4
1 delivery vehicle
R190 000
5
Furniture
R80 000
6
Computer equipment
R110 000
7
Cleaning equipment
R30 000
Total
R 760 000
To be profitable, it is necessary to cover the monthly expenditure. However, Mr
Khoza is faced with additional challenges. For example, there is another caravan
park about 10 kilometres away, and it is a well-administered and very popular resort.
Therefore, Mr Khoza faces intense competition and should ensure that he attracts
enough clients to make his business successful and profitable. He must therefore
ensure that the caravan park establishes a good reputation. Furthermore, there have
been several electricity outages. The number of outages experienced during the last
year is reflected in table 3 below.
Table 3: Electricity outages per month
Month
Jan
Outages 3
•
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1
2
6
6
7
8
9
5
2
1
4
These outages sometimes last for 2–4 hours, which can negatively influence
the business’s reputation, causing a loss of income. Peak times for the
business are April, December and January. An acceptable threshold for
outages is 2 to 3 per month. Therefore, Mr Khoza must manage electricity
outages as a key risk indicator.
•
Another potential problem facing Mr Khoza during peak times is that the
maintenance staff feel overworked. They have indicated that they want an
additional allowance during these peak times for work they must do after
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hours, and they have threatened to strike if this additional allowance is not
granted.
•
Another issue brought to Mr Khoza’s attention is that the lawnmowers and the
washing machines require specialised operators. Therefore, the staff must be
trained accordingly. Maintenance also requires staff to be trained as painters,
which also requires special training. Currently, Mr Khoza employs the
minimum number of staff, with the result that if one staff member takes leave
or falls ill, it has a negative effect on the continuity of the business. Currently,
all employees must make provisions for their own pension and medical care,
which can also cause an unacceptably high staff turnover.
•
Being an outdoor facility, the weather can affect the business’s profitability.
However, this is difficult to manage as it is not a controllable factor. Another
external factor is global warming, which causes the sea level to rise higher
than the normal high-water mark, especially during spring tides and new
moon). As a result, the caravan park faces a major risk of flooding during bad
weather because there are ten stands close to the sea, which could be
flooded during the high tide. It is imperative that Mr Khoza attends to this risk
because it can threaten the campers on those stands, as well as the electricity
and water supply to the whole park. Spring tides usually occur twice a month,
at the full and new moon. Additional information in this regard is set out in
table 4.
Table 4: Height of swells during the high tide of the monthly spring tides
during the previous year
Month
Jan
Feb
Mar
Apr
May Jun
Height 1.80 1.78 1.84 1.85 2
2.1
Jul
Aug
Sep
Oct
Nov
Dec
2.30 2.43 2.44 1.84 1.80 1.77
(m)
The swells’ height directly influences the sea’s level, and it was found that
when the height exceeds 1.99 metres, up to ten of the stands are flooded by
the high tide, making these stands unusable. To be proactive, Mr Khoza
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decided to take precautionary measures when the swells reach a height of
1.85 metres.
•
To make a success of business, it is vital that the risks be managed
appropriately. In addition, it is imperative that the risks be monitored
continuously to ensure proactive preventive measures. Consequently, Mr
Khoza is considering appointing either a risk manager or an internal auditor in
this regard. However, he is currently unsure which functionary would be more
suitable, so he has decided to investigate the matter further.
As a risk manager, you are required to answer the following risk-related questions to
determine if the business is “worth the risk”.
QUESTIONS
[75]
Question 1
(10)
Insurance forms an important part of risk appetite. However, it is necessary for a
business to be adequately insured. Explain the risk transfer concept and analyse the
insurance adequacy for the caravan park, considering all the relevant information in
the case study. Make a final recommendation that will ensure adequate insurance
cover for Mr Khoza.
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Question 2
(10)
People play a major role in ensuring that Mr Khoza’s business is successful. Discuss
people risk as an important operational risk factor and analyse how Mr Khoza can
manage the people risk in his business.
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Question 3
(20)
Using key risk indicators (KRIs) is crucial to operational risk management. Briefly
distinguish between a key performance indicator and a key risk indicator. Using the
information in the case study, illustrate – by means of graphs – how the risk of
system downtime and the height of the swells can be monitored. Explain the current
trends and make recommendations to mitigate the risks.
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Graphs:
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Question 4
(10)
Define operational risk as it applies to Mr Khoza and elaborate on the two external
factors (excluding the sea levels and electricity outages) that could negatively
influence the well-being of the caravan park. Recommend potential control measures
for each exposure.
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Question 5
(10)
Calculate the potential annual gross income and profit/loss for Mr Khoza based on
the available information in the case study. Indicate if the business is a feasible
proposition based on all the information provided.
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Question 6
(15)
Prepare a brief for Mr Khoza to elaborate on the roles and responsibilities of the roleplayers of the second and third lines of defence regarding risk management. Based
on your analysis, make a recommendation to Mr Khoza on a suitable appointment to
assist him with risk management.
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SECTION B
Question 7
(10)
An operational risk policy is crucial to ensure an adequate risk management process
and to support the achievement of business objectives. The content of such a policy
differs from organisation to organisation but should, as a minimum, contain specific
concepts. Briefly discuss four concepts that must be included in an operational risk
management policy.
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Question 8
(10)
Risk and control self-assessments are another operational risk management tool that
can be used to manage operational risk exposures. Explain this concept in detail.
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Question 9
(5)
In the wake of the COVID-19 pandemic, many organisations moved to work fully
online. This increased cybercrime. Identify and give examples of the various forms of
corporate cybercrime experienced by these organisations.
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TOTAL MARKS = 100
END OF QUESTION PAPER
©
Unisa 2023
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