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Chapter 4 Risk ManagementChapter 4 Risk Management
BCN 4772 Summer 2007BCN 4772 Summer 2007
Risk ManagementRisk Management
What is Risk?What is Risk? Specific types of RiskSpecific types of Risk
InflationInflation MarketMarket PrincipalPrincipal LiquidityLiquidity CreditCredit
Two categories of riskTwo categories of risk Speculative RiskSpeculative Risk Pure RiskPure Risk
What is Risk Management?What is Risk Management?
Risk ManagementRisk Management
Types of lossesTypes of lossesPropertyPropertyFinancialFinancialLiabilitiesLiabilitiesLosses involving personnelLosses involving personnel
Risk ManagementRisk Management
Risk Management ProcessRisk Management Process Identify and analyze loss exposureIdentify and analyze loss exposureEvaluate alternativesEvaluate alternativesSelect the best techniquesSelect the best techniques ImplementImplementMonitor and adjustMonitor and adjust
Risk ManagementRisk Management
Return
Risk
Risk / Return Tradeoff
Risk ManagementRisk Management
Transfer risk exposureTransfer risk exposure InsuranceInsurance
RequiredRequiredCovers specific riskCovers specific riskSelection is importantSelection is importantDisclosureDisclosureBest’s Rating Guide Best’s Rating Guide
Risk ManagementRisk Management
Property insuranceProperty insuranceCovers losses due to destruction of personal Covers losses due to destruction of personal
or company propertyor company propertyReplacement cost Replacement cost ValueValueCoinsuranceCoinsuranceSpecific perilsSpecific perilsExclusionsExclusions
Risk ManagementRisk Management
Financial Loss ExposureFinancial Loss ExposureLoss of net incomeLoss of net incomeDecrease in revenues and increase in Decrease in revenues and increase in
expensesexpensesBusiness interruption insuranceBusiness interruption insurance
Covers rental equipment costsCovers rental equipment costsWork stoppage costsWork stoppage costsTemporary relocation costsTemporary relocation costs
Risk ManagementRisk Management
Business Liability ExposuresBusiness Liability ExposuresLegal liability lossesLegal liability lossesBodily injuryBodily injuryProperty damageProperty damageOther injuryOther injuryCaused by employees or subcontractorsCaused by employees or subcontractorsThird party agreementThird party agreement
Risk ManagementRisk Management
Contract Liability ExposureContract Liability ExposureExculpatory ClausesExculpatory Clauses
Hold-harmlessHold-harmlessIndemnificationIndemnification
Contract Liability exclusionContract Liability exclusion
Risk ManagementRisk Management
Other types of coverageOther types of coverageBusiness Automobile PolicyBusiness Automobile PolicyWorkers Compensation InsuranceWorkers Compensation InsuranceEmployee Benefits Liability CoverageEmployee Benefits Liability CoverageEmployment Practices LiabilityEmployment Practices LiabilityUmbrella Liability PolicyUmbrella Liability PolicyPersonnel Loss ExposuresPersonnel Loss Exposures
Risk ManagementRisk Management
Premium RatesPremium Rates PropertyProperty
Full valueFull value Fire rate Fire rate Flood rateFlood rate Wind rateWind rate EtcEtc
Maximum values at riskMaximum values at risk Credits for certain amenitiesCredits for certain amenities Payroll or gross salesPayroll or gross sales LocationLocation ReputationReputation
Risk ManagementRisk Management
Bond ObligationBond Obligation Guarantee by third partyGuarantee by third party Insures that the work will be doneInsures that the work will be done Not insuranceNot insurance Surety bond Surety bond Three party agreementThree party agreement
ContractorContractor GuarantorGuarantor OwnerOwner
Protects the taxpayerProtects the taxpayer
Risk ManagementRisk Management
Types of BondsTypes of BondsBid BondBid Bond
Forfeiture ObligationForfeiture ObligationDifference in BidDifference in Bid
Performance BondsPerformance BondsPayment BondsPayment Bonds
Risk ManagementRisk Management
Important People in Bonding processImportant People in Bonding processCPACPABankerBankerAttorneyAttorneyBonding agentBonding agentProfessional bond teamProfessional bond team
Risk ManagementRisk Management
Bond issuersBond issuersTreasury DepartmentTreasury Department
T-listT-listMax amountsMax amounts
A.M. BestA.M. BestPrivate ratingPrivate ratingA+ - C-A+ - C-Gives insight to condition of companyGives insight to condition of company
Risk ManagementRisk Management
Florida Statute 287.0935 1985Florida Statute 287.0935 1985Allows smaller surety companies to provide Allows smaller surety companies to provide
bondsbondsMust have a treasury listingMust have a treasury listingProjects under $500,000Projects under $500,000This provision allows smaller companies to This provision allows smaller companies to
develop a reputationdevelop a reputation
Risk ManagementRisk Management
UnderwritingUnderwriting CapitalCapital CharacterCharacter CapacityCapacity
Default optionsDefault options Bank roll the contractor until completionBank roll the contractor until completion Dissolve the contract pay the difference for new Dissolve the contract pay the difference for new
contractcontract Leave it to the owner to negotiateLeave it to the owner to negotiate Use own contractUse own contract
Risk ManagementRisk Management
Information needed by the SuretyInformation needed by the Surety 3 yrs of financials 3 yrs of financials Personal financial statements of all stockholdersPersonal financial statements of all stockholders Schedule of equipment availableSchedule of equipment available Schedule of contracts in progressSchedule of contracts in progress Resumes on key peopleResumes on key people History of businessHistory of business Letter of credit from bankLetter of credit from bank Reference lettersReference letters Surety questionnaireSurety questionnaire Organization chartOrganization chart
Risk ManagementRisk Management
IndemnityIndemnityLegal right of suretyLegal right of suretyPrevents non compliance by principalPrevents non compliance by principalAgreement requires signatures of all Agreement requires signatures of all
corporate stockholders and spousescorporate stockholders and spousesContinuityContinuity
Risk ManagementRisk Management
Other surety interestsOther surety interests Financial StatementsFinancial Statements
AuditAudit ReviewReview CompilationCompilation
Income recognitionIncome recognition CashCash Completed ContractCompleted Contract Accrual Accrual Percentage of completionPercentage of completion
RatiosRatios Net quickNet quick
Actual contractActual contract
Risk ManagementRisk Management
Bond CostsBond CostsPremium based on contract pricePremium based on contract priceMultiplied by a rate per thousandMultiplied by a rate per thousandMay very from firm to firmMay very from firm to firmAll premiums are subject to changeAll premiums are subject to changeStandards set for certain classes of contract Standards set for certain classes of contract
ratingsratings
Risk ManagementRisk Management
Small Business Administration GuarantySmall Business Administration GuarantyGuaranties a portion 70%-90%Guaranties a portion 70%-90%Allows for newly stated contractors to get Allows for newly stated contractors to get
bondedbondedMax $1,250,000Max $1,250,000Contractor must be under $5,000,000 annualContractor must be under $5,000,000 annualCharges to contractor of additional $6 per Charges to contractor of additional $6 per
thousandthousandMay require collateral, escrow agent and May require collateral, escrow agent and
updates of projectupdates of project
Risk ManagementRisk Management
Dealing with riskDealing with risk IdentifyIdentifyPlan Plan MonitorMonitorAnticipateAnticipate Improve companyImprove company
