Introduction
The fundamental concept of risk and reward is more beneficial as far as finance and business are concerned. It revolves around the idea that, generally higher potential rewards come with higher associated risks. This relationship is vital for most of the organization regarding decision-making. It also influences strategic choices, investments, and operational approaches (Nzyoka & Orwa, 2016, p. 30). The challenge is finding the balance that allows an organization to harness the benefits of risk-taking while mitigating the potential downsides. In the context of LTD Acceptance, the apparent success in the paper caused by its dominance in the sports car and motorcycle insurance market may cover the risks involved. While specializing in a niche market can produce high returns and increase their competitive edge, it also exposes the company to challenges (Nzyoka & Orwa, 2016, p. 34). The concentration of policies in a high-risk category, like dealing with cars and motors, presents a scenario where significant losses may exist. The risks involved in this case include the inherent dangers of insuring high-performance vehicles and external factors such as economic failure, regulatory changes, and changes in consumer preferences.
Why LTD Acceptance Appears Better on Paper
The company may be better on paper than it is because of its dominance in the sports car and motorcycle insurance market, driving 70% of the total revenue for its parent company, LTD Capital. This fact may create an illusion of strength, leading people to believe it is doing better. On the same note, this market’s undeserved nature and competitors’ increased reluctance to venture into the same business could mask the risks involved. The concentration of policies in a high-risk category may make the company susceptible to unexpected challenges like market fluctuations, regulatory changes, and events affecting the sports car and motorcycle industry. Some of the causes that could increase its success ratio include, among others, the fear of the competitors that the same venture is associated with various risks. While this may appear to be an advantage for LTD Acceptance, it might indicate that other investors have assessed the risk-reward profile as unfavorable, leading to a lack of competition. The limited diversification in the types of insurance policies offered might make the organization more susceptible to risks.
Impact on Different Parties
Moreover, different stakeholders may be adversely affected if the company suffers losses due to a more aggressive approach. The policyholders, for instance, may face the challenge of increased risk exposure in the form of higher insurance premiums. In its pursuit of higher returns, the organization may pass on the increased costs to policyholders. They may also experience deterioration in service quality (Plantin & Rochet, 2016). The focus on aggressive risk-taking without adequate risk management could divert resources away from customer services and claims processing. Shareholders as well may also experience the risk of stock price decline. The value of their investment would decrease if the organization suffered losses due to the more aggressive asset allocation strategy. Another impact may come through reducing or eliminating the dividends (Plantin & Rochet, 2016). The company prefers this as a solution to cope with the financial setbacks. This can even diminish the attractiveness of the company’s stock, negatively impacting shareholders. The vendors may need help with financial strain and delayed payments. In other circumstances, they may be forced to renegotiate contracts on less favorable terms. Disruption in supply chains is also another impact that may hit them. The creditors may experience changes in loan repayments as they may be late because the company has financial difficulties (Plantin & Rochet, 2016). There may also be increased interest rates for future agreements. To the employees, the company may resort to cost-cutting measures, leading to job insecurity. They may also enjoy decreased employee benefits, affecting their satisfaction and loyalty, potentially leading to talent retention challenges.
Financial Management and Risk Management
Risk management is an essential element for businesses in modern finance functions. Through it, the finance teams can develop strategies, policies, and procedures to retaliate against the emergency if unexpected events occur. Effective financial management also involves optimizing resource allocation to maximize returns while minimizing risks. In the case of LTD Acceptance, diversifying premium dollars across various asset classes is a better financial strategy to enhance stability (Yang et al., 2018). Financial management also helps identify risk, analyze it, and make investment decisions based on accepting or mitigating it. This could effectively align with risk management as some risks are dealt with.
Conclusion
Overall, the risk assumed by an organization’s activities should align with its long-term goals. While pursuing profitability is crucial, it is equally essential to ensure that risk exposures are carefully managed to avoid negative consequences for stakeholders. A calculated risk approach, rather than an aggressive one, is better as it could help to maintain a sustainable and resilient business model. Striking the right balance between risk and rewards is crucial for the long-term success and stability of the organization.
References
Nzyoka, C. M., & Orwa, B. H. (2016). The relationship between Total compensation and employee performance in the insurance industry, case of Mayfair Insurance Company Limited. Psychology and Behavioral Sciences, 5(1), 20-36. https://d1wqtxts1xzle7.cloudfront.net/88802638/10.11648.j.pbs.20160501.14-libre.pdf?1658333621=&response-content-disposition=inline%3B+filename%3DFootball_et_publicite_analyse_des_struct.pdf&Expires=1702019635&Signature=Qfhax3ZeVGjt6aT0DvYlQZr1FiHoaZnZ2fTL~xuzIuUROL4lhmLEnegBXo~-mL95aFMIeExj9LYdp5Q3NvTkLqPzA8CRUjwXWI95Vkp2jEowlfg~0dHse~gw4alLLWJ1BglfJoFevDu3TKj5i50jOE0JJZSXHuErfuJKut7NNb-o-WZW4sxeu0JEGZyl4K9GvP59iV~x1-Pf3DU2cCc2vVbGPicVrDCYFLOPuBGSu~53UiQPYnOmPEkSfqjaYlkJV9qEeeuOr6CnD~KVXVAWLUcFNLlDTXZhHX8Il~-LWhDJR4B3iIv2Rg0TmPkLzxZ5zOIqYvQs3zht2szhYFXShA__&Key-Pair-Id=APKAJLOHF5GGSLRBV4ZA
Plantin, G., & Rochet, J. C. (2016). When insurers go bust: an economic analysis of the role and design of prudential regulation. Princeton University Press.
Yang, S., Ishtiaq, M., & Anwar, M. (2018). Enterprise risk management practices and firm performance, the mediating role of competitive advantage and the moderating role of financial literacy. Journal of Risk and Financial Management, 11(3), 35. https://doi.org/10.3390/jrfm11030035
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