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Chapter 4 Risk Management

Chapter 4 Risk Management. BCN 4772 Summer 2007. Risk Management. What is Risk? Specific types of Risk Inflation Market Principal Liquidity Credit Two categories of risk Speculative Risk Pure Risk What is Risk Management?. Risk Management. Types of losses Property Financial

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Chapter 4 Risk Management

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  1. Chapter 4 Risk Management BCN 4772 Summer 2007

  2. Risk Management • What is Risk? • Specific types of Risk • Inflation • Market • Principal • Liquidity • Credit • Two categories of risk • Speculative Risk • Pure Risk • What is Risk Management?

  3. Risk Management • Types of losses • Property • Financial • Liabilities • Losses involving personnel

  4. Risk Management • Risk Management Process • Identify and analyze loss exposure • Evaluate alternatives • Select the best techniques • Implement • Monitor and adjust

  5. Risk Management Risk / Return Tradeoff Return Risk

  6. Risk Management • Transfer risk exposure • Insurance • Required • Covers specific risk • Selection is important • Disclosure • Best’s Rating Guide

  7. Risk Management • Property insurance • Covers losses due to destruction of personal or company property • Replacement cost • Value • Coinsurance • Specific perils • Exclusions

  8. Risk Management • Financial Loss Exposure • Loss of net income • Decrease in revenues and increase in expenses • Business interruption insurance • Covers rental equipment costs • Work stoppage costs • Temporary relocation costs

  9. Risk Management • Business Liability Exposures • Legal liability losses • Bodily injury • Property damage • Other injury • Caused by employees or subcontractors • Third party agreement

  10. Risk Management • Contract Liability Exposure • Exculpatory Clauses • Hold-harmless • Indemnification • Contract Liability exclusion

  11. Risk Management • Other types of coverage • Business Automobile Policy • Workers Compensation Insurance • Employee Benefits Liability Coverage • Employment Practices Liability • Umbrella Liability Policy • Personnel Loss Exposures

  12. Risk Management • Premium Rates • Property • Full value • Fire rate • Flood rate • Wind rate • Etc • Maximum values at risk • Credits for certain amenities • Payroll or gross sales • Location • Reputation

  13. Risk Management • Bond Obligation • Guarantee by third party • Insures that the work will be done • Not insurance • Surety bond • Three party agreement • Contractor • Guarantor • Owner • Protects the taxpayer

  14. Risk Management • Types of Bonds • Bid Bond • Forfeiture Obligation • Difference in Bid • Performance Bonds • Payment Bonds

  15. Risk Management • Important People in Bonding process • CPA • Banker • Attorney • Bonding agent • Professional bond team

  16. Risk Management • Bond issuers • Treasury Department • T-list • Max amounts • A.M. Best • Private rating • A+ - C- • Gives insight to condition of company

  17. Risk Management • Florida Statute 287.0935 1985 • Allows smaller surety companies to provide bonds • Must have a treasury listing • Projects under $500,000 • This provision allows smaller companies to develop a reputation

  18. Risk Management • Underwriting • Capital • Character • Capacity • Default options • Bank roll the contractor until completion • Dissolve the contract pay the difference for new contract • Leave it to the owner to negotiate • Use own contract

  19. Risk Management • Information needed by the Surety • 3 yrs of financials • Personal financial statements of all stockholders • Schedule of equipment available • Schedule of contracts in progress • Resumes on key people • History of business • Letter of credit from bank • Reference letters • Surety questionnaire • Organization chart

  20. Risk Management • Indemnity • Legal right of surety • Prevents non compliance by principal • Agreement requires signatures of all corporate stockholders and spouses • Continuity

  21. Risk Management • Other surety interests • Financial Statements • Audit • Review • Compilation • Income recognition • Cash • Completed Contract • Accrual • Percentage of completion • Ratios • Net quick • Actual contract

  22. Risk Management • Bond Costs • Premium based on contract price • Multiplied by a rate per thousand • May very from firm to firm • All premiums are subject to change • Standards set for certain classes of contract ratings

  23. Risk Management • Small Business Administration Guaranty • Guaranties a portion 70%-90% • Allows for newly stated contractors to get bonded • Max $1,250,000 • Contractor must be under $5,000,000 annual • Charges to contractor of additional $6 per thousand • May require collateral, escrow agent and updates of project

  24. Risk Management • Dealing with risk • Identify • Plan • Monitor • Anticipate • Improve company

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