Stewart Information Services Corp’s business is based on the title insurance and real estate services in the US and abroad. They always keep the data of the customers confidentially. Title insurance always provides security, speed and savings to the customers. They keep the record of the properties which are sold and they are always ready to solve any type of difficulty regarding the ownership. They reduce the risk involved in transaction of the property. The forward looking statement of this company arises on the basis of Private Securities Litigation Reform Act of 1995.
Perceived risks of Stewart Information Services Corp
The forward looking statement of Stewart Information Services Corp is it focuses on the future business and the financial state. The forward looking statement of Stewart Information Services Corp leads to some risks. The forward looking statement of the company expects some sort of result in future. But sometimes the actual result of the company has got some difference compared to the result expected from the forward looking statement. This is the main cause of risk in the company. The changes occurring in the real estate business, current economic conditions, lack of knowledge about how to utilize the new technologies and the enterprise systems and how to implement it, the regular changes in the government policies, dependencies on the source of cash flow etc are the some main reasons of the risks. The main cause of risk is that the outcome is very less compared to the expected value and possibility of expectable output. Risk always reduces the output. The major types of perceived risk of Stewart Information Services Corp are price risk, credit risk and pure risk.
Price risk
It is defined as changes in the security such as money in future due to changes in input and output prices. Price risk may also occur due to the fluctuations of interest rate, variation in the price of the commodity etc. Price risks are of two types. They are output price risk and input price risk.
- Output price risk: The main cause of output price risk of Stewart Information Services Corp is change in economic conditions. The Competition between the same types of organization in the market will badly affect the profit of the company and it will reduce the expected future cash flows.
- Input price risk: Changes in the price of factors of production is usually termed as input price risk. Stewart Information Services Corp faces some input price risks. Some causes of the input risks are increasing material and labour cost, increase in the cost of construction etc. This will badly affect the future cash flows.
- Interest rate risk: The investment value will change due to the total level of interest rate. Changes in interest rates affect the company’s cost of borrowing. Stewart Information Services Corp faces some interest rate risks. One main cause of interest rate risk is the following. Increases in market interest rates could encourage investors of common stock to demand a higher yield, and higher dividend payments could reduce the future cash flows of the company. The other cause of interest rate risk is decrease of the rate of interest may yield negative impact to the company. Increase in interest rate always gives positive impact.
Credit risk
It occurs due to the loss of principal or loss of financial support due to failure from the part of borrowers. That means sometimes they fail to pay back the loan that they have taken which causes lot of risk in business. The main reason for credit risk is that borrower uses the future cash flow for their present use. Investors are remunerated for assuming credit risk by way of interest payments from the borrower. Credit risk is strictly in connection with the potential return of an investment. It is calculated by considering the overall ability of a borrower to repay the amount. Stewart Information Services Corp faces some credit risks. Insufficiency in the cash flow and instability in the debt market are some reasons for credit risks in Stewart Information Services Corp.
Pure risk
This is a kind of risk that all businesses can have. Stewart Information Services Corp faces some sort of pure risks because of legal liability, damage to the asset and worker injury. The damage of the asset due to catastrophes such as floods, hurricanes and earthquakes are the main cause of pure risks.
Methods of managing risks-loss control, loss financing and internal risk reduction
Stewart Information Services Corp is the organization which provides title insurance to housing, business properties etc and also provides real estate service. Managing such a big company needs appropriate management in order to reduce risk. Risk management method provides a great valuable and effectual technique to achieve better performance and success of the business. A quality risk management method focuses on emergency and disaster management.These are some of the methods to manage risk in this organization.
Loss of Control
Loss of control is the activity to control the loss in the business. In order to control the loss, this company should reduce involvement in risky activities and should also take preventive measures against the risk in future. There should be a goal for every business and prioritization should be given to achieve this goal. Risk is involved in every field; so one should foresee the risk in every activity and apply appropriate technique to eradicate the risk. Try to avoid the involvement of risky activities in the business because business without risk can only run in a smooth way; otherwise there will always be a problem. Improve the measures to evade risk and accidents. As Stewart Information Services Corp has branches in other parts of the world, one cannot direct every branch to appoint more employees to handle each branch. The management handling the overall activities of an organisation should be qualified and intelligent; moreover, they should have specific knowledge to facilitate a business to perform their activities adequately and independently. Today, there are many such organizations which are in great competition; so for the existence of an enterprise in the market needs efficient management and a better assessment of risk is necessary for a good risk management. After the estimation of risk, at least two or three options must be there for appropriate decision making. Moreover, immediate action must be taken against the problem. When implementing a risk management plan, it should fit the developing process of the business.
Loss of financing
An enterprise may fail due to various reasons. In order to avoid the financial loss, every company or business enterprise should be insured. Yet, if the business fails, the fund invested in the business can be recovered if it is insured. In a business enterprise, whether it is big or small, there will be some risks which cannot be avoided; in such cases risk retention helps the enterprise to recover from the loss because it “Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained.” (Risk Management para.1). Self insurance helps to control the small risk in an enterprise and reserve the loss that may occur in future. Hedging is another method to avoid risk. There will be fluctuation of prices for every product in the market; sometimes it will be high or sometimes it will be low which leads to loss or gain for the business. If the business fails due to immediate price fluctuation, this method protects the business assets from undesirable alteration in the market rates. Risk transfer is somewhat like the insurance in order to overcome the damage of the asset. The company insures the property by putting some premium to their asset. In this method, one who is having the risk will transfer the risk to another party to avoid his risk. Sometimes in a risk management process, unexpected serious events will occur; hence the emergency management should be well-prepared to make sure the continuity of the business without any trouble.
Internal risk reduction
Internal risk is the trouble that occurs from the company itself which may be caused due to frauds committed by staff. The fraud or misbehaviour of a single staff can demolish the business. So, in order to avoid such risk, it should identify and prevent such fraud from the company and suitable measures should be taken against this. Importance should be given for internal controlling to avoid this incidence. When developing a risk management plan in an organisation, first discover the risk and investigate them properly to select suitable action against the risk. Then, implement the risk management methods or plan.
Loss types for pure risks, and for damage to assets
Pure risk is the class of risk in which there are no useful results. In this type of risks there can be loss or there may not be loss. But, there cannot be any gain in this type of risks. Pure risk is concerned with possible losses compared to the loss that is expected. The insurance handle the pure risks and may involve loss of wealth to society. They are seen commonly in life and in business. Pure risks can cause huge losses to the company. The different types of pure risks are property risks, personal risks and liability risks. The personal risks directly affect a person. They can be a loss of income, expense, reduction in financial properties etc. Some of the personal risks include the risk of unemployment, risk of insufficient income after retirement, risk of premature death and risk of poor health. Unemployment problem causes lack of financial security. The competition in business causes the companies to reduce their workers which cause unemployment. Reducing the workforce helps the companies to be free from financial problem. But the labours will have to face the financial problem. There may be financial problem for individuals who had retired from their work. There will not be financial security for those people if they don’t have enough financial possessions or if they don’t have pensions. Premature death is another type of risk. It is the death of the head of a family. It will cause financial insecurity in children. Poor health is another type of personal risk. When a person has poor health, he will have to pay for his treatment. This will cause loss of earned income. Property includes all the nonliving owned by people. The natural phenomena can cause damage to real estate and other properties. These natural catastrophes thus can cause damage to the resources. Damage to the assets due to natural calamities like earthquakes, storms, floods etc can reduce the business value. The problems like environmental contamination can result in the spending of considerable costs. The business spends a large amount of cost in maintaining the personnel like executive officers for the smooth functioning of the company. Legal liability risk arises due to injury to body or damage to property.
The pure risks in the company can cause the outputs to be different from the expected outputs. These risks include the economic and financial conditions and other changes in the real estate processes. It also can affect the cash flow of the company. The pure risks can affect the outcome of the company. It reduces the profit of the company. It can also affect the lives of the people. The wealth of the people can get damaged. Pure risk cannot be controlled by people. It occurs due to an unexpected event. People cannot predict the occurrence of this event. The occurrence of this event will cause financial losses in the company. The assets of the company will get damaged. All the investments of the company can get lost. The insurance company generally insures only pure risks because there is only loss in this type of risk. Thus, pure risks can cause many losses and damage to assets.
Evaluate the potential frequency and severity of losses
The risks in an organisation cause many losses. The potential frequency and severity of losses can be high or low. The frequency is the calculation of the number of times a loss occurs and severity is the measure of the amount of damage that will be caused if the loss occurs. An estimate about this is done because it is used for the evaluation of the loss due to a risk in an organisation. This is calculated on the basis of the loss of finance, loss of resources etc. The losses affect the financial stability of the company. The evaluation of potential frequency is easier for the losses that occur frequently and it will be difficult for the losses that do not occur frequently. In the commonly occurring losses, there can be some increase or decrease in risks. This also should be considered in the evaluation. In the evaluation of severity, several factors are considered like the value of the loss expected, the amount of loss the company can handle, the tolerance of the authorities against risk etc. The estimated frequency and severity of losses can vary. Only an approximate calculation can be made on this. The future losses due to a risk can be different from the past losses due to that same risk.
Transferring, retaining and insuring risk
Risks that would be retained:By using either external or internal funds or even both, the company can reduce the risks. Such type of risks is known as retaining risks. Output price risk and damage to the property come under this category.
Output price risks: When there are changes in the price, the company can ask for its goods and services should be retained. The company has no control over these prices, and therefore, retains the risk, that is, cash flows from rental income or sales will drop.
Damage to property:There are several losses which are not able to cover by insurance. At that time Company is responsible to pay for the losses. Such type of losses include the losses occurred due to inflation. Therefore, the company itself would have to retain some of the losses.
Risks that would be transferred/insured
Interest rate risk: This risk occurs due to regular changes in the interest rate. These changes may affect the company’s cost of borrowing and lending money. The company should transfer this risk to another party by entering into hedging agreements which are used to offset losses that occur from changes in interest rates. The company can use fixed income instruments or interest rate swaps to transfer the expected losses to the other party involved in the hedging agreement.
Damage to property: In order to overcome some losses like damage to the property, they insure their property by putting some premium payments to their property to reduce the companies’ risks. Stewart Information Services Corp now aims to identify the type of risks that they suffer and for that they adopted various risk control methods by evaluating the risk properly.
Monitor the performance of the risk management methods
In order to reduce the risks that are faced by the company they developed an action plan. The action plan is prepared by analysing the type of risks. The implementation of the action plan is a continuous process and the company’s executive director is responsible for implementing this action plan. Implementation strategies which require additional funding may have to be deferred until the funds can be included in the budgeting process.The executive director of the company analyzes the type of loss of the company and takes necessary steps. The major type of loss is the decline of orders.The decline of orders will lead to decrease in home sales, home price etc and also worsening policy claims payments. Thus, revenue of the company reduces. In order to overcome these difficulties they implement cost reductions throughout the company. They also expand their shared services and contract relationship with other agencies. They also combine many of the separate corporate units to serve their customers better. The other method for reducing the risk is they try to increase the administrative efficiency of the company and reduces the fixed costs. The company tries to reduce the risks through the evaluation and cancellation of higher risk title agencies and by assessing possible title agencies prior to adding them to company’s agency workers. They also try to respond to all the market conditions regularly. In addition to that, they simplify their rate structure to reduce the complexity in understanding by the customers. The new multi-state foreclosure trustee company provides default services. It helps to reduce the risks. To carry the functions of the company in an easier way, they approach web-based production systems and all types of services are carried out through internet, which result in no loss of service or files. By successfully implementing the action plan, the company can overcome the risks that they face.
Works Cited
Risk Management: Risk Retention. Economic Expert.com. 2009. Web.