Swiss Re New Markets Art Academy - Bosna RE

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Swiss Re New Markets Art Academy - Bosna RE

Index II• Pricing• Key Elements, Example• Underwriting• Claims• Capital, Capacity, Character, Collateral, Conditions, Confidence,Cedant• Reason, Handlin and RecoverySwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 3


Suretyship• Definition• Triangular Relationship• Obligations of Parties involved• Key Elements• Insurance vs Suretyship• Types of Bonds• Types of Bond WordingsSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 4


Suretyship DefinitionSuretyship may be defined as anobligation which one party (Surety / Guarantor)undertakes to another party(Beneficiary / Obligee / Project Owner)for the debts, obligations and/orconduct of a third party(Principal / Contractor / Guaranteed).Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 5


SuretyshipBasis Contract: PerformanceBasis Contract: PaymentContractor PrincipalProject Owner BeneficiaryPremiumCollateralsBONDRight ofSubrogationClaimsSuretySwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 6


Obligations of the Contractor /Principal• Performance in accordance with the terms and conditions ofthe Basic Contract• Payment of the premium for the Bond• Indemnify the Surety for any payments made under the bondor other costs incurred as a surety of the relevant project• Provide the Surety with all relevantinformationSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 7


Obligations of the Surety / Guarantor• To abstain from making any payments under the bond if theContractor / Principal has a valid defence• Professional claims handling with prompt payments if ProjectOwner / Beneficiary has sustained a lossSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 8


Obligations of the Project Owner /Beneficiary• Performance in accordance with the terms and conditions ofthe Basic Contract• Inform the Surety of all major changes agreed upon inrespect of the underlying agreement, progress of work aswell as arising problems• Discharge the Surety from its liabilitiesafter completion of the contractSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 9


Key Elements in Bonding• Accessory InstrumentThe need for an underlying obligation ( Basic Contract)• Joint & Several LiabilityBoth the Surety and Guaranteed are liable• Limited LiabilitySurety’s liability is limited to the bond amount• Right of IndemnificationSurety is entitled by law to be refunded for any payments made under thebond by the defaulting contractor for any paymentsSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 10


Key Elements in Bonding• Non-CancelableContrary to other insurance products a bond can not be cancelled until theunderlying obligations have been fulfilled• SubrogationAs soon as the Surety steps in due to failure of theContractor all obligations and right of the Contractorare automatically inherited by the SuretySwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 11


Insurance vs Suretyship• Two Party contract between Insurer& Insured• Triangular Relationship of threeparties• Premium is calculated to covercosts, losses and profits• Law of large numbers• Premium is mere servicecharge• Law of large number notapplicable 0% claims ratiounderwriting• Normally no recovery aftersettlement of lossesSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmic• Unchanged obligations ofbonded party incl. Right ofsubrogation of the suretyZPage 12


Types of Bonds• Contract BondsAdvance Payment, Bid, Performance, Supply, Maintenance, Ret. Money, L&M• License & Permit BondsWarehouse, Tax, License• Customs BondsDeferred Duty Payment, Immigration, Re-exportation• Excise BondsAlcohol, TobaccoSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 13


Types of Bonds• Judicial BondsPlaintiff, Attachment, Replevin, Injunction, Administration• Fidelity BondsAgent, Employee, Forgery• Financial Guarantee BondsLoans, Mortgage, PaymentSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 14


Types of Bond Wording«Conditional Bonds»Accessory to the basic contract with claims payments only being made afterhaving obtained full evidence as to whether the principal has defaulted and asto the size of the actual sustained damage incurred by the beneficiary«Unconditional Bonds»Abstract Guarantees which are not accessory to the basic contract and underwhich payment becomes due upon first demand of the beneficiaryindependent of whether the principal has defaulted or notSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 15


Surety Bonds vs Abstract GuaranteesSuretyshipAbstract GuaranteesComparisonUnderwriting AspectsSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 16


SuretyshipBasis Contract: PerformanceBasis Contract: PaymentContractor PrincipalProject Owner BeneficiaryPremiumCollateralsBONDRight ofSubrogationClaimsSuretySwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 17


Abstract GuaranteesBasis Contract: PerformanceBasis Contract: PaymentContractor PrincipalContract of two PartiesProject Owner BeneficiaryContract of two PartiesPremium / SecuritiesGuaranteed Contractor PrincipalSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicGUARANTEEGuarantor Bank Insurance CoZPage 18


Suretyship vs GuaranteesConditional vs On Demand Bonds• Bond accessory to underlying contract(I.e. basic contract = integral part ofbond• Bond valid until expiry of basiccontract• Payment only due after default ofprincipal has been identified• Claims handling which requires knowhowand resources done by Surety• Legal right of subrogation• Two individual contracts betweentwo parties each• Limited period with a clear & validexpiry date• Payment due upon first demandwithout the right to interfere• Fair claims handling very difficult• No automatic right of subrogationin case of paymentSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 19


Unconditional BondsUnderwriting Aspects• Bond WordingAbstract and/or on demand almost no valid defence not to pay incase of a claim, even if unfair call is obvious• Risk involvedBoth parties involved represent a risk ( contractor = nonperformance & beneficiary = unfair call)• Basic ContractIf abstract, guarantee no longer integral part of the basic contractand therefore important terms & conditions should be stipulated inthe guarantee wording itself• SecuritiesCounter-guarantee wordings should also be on demand / Banks askfor 100% collateral unless granted within an approved credit facility?Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 20


ExposureWhat Constitutes a Risk?• Apartments in a Condominium House (Property Insurance)• Several Houses in a Residential Area (Natural Hazards)compared to• Contractors belonging to one HoldingCompany ( One Risk?!)• Construction Industry( Recession)Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 21


What constitutes a risk?Condo-House AApartment A7Apartment A8Apartment A5Apartment A6Apartment A3Apartment A4Apartment A1Apartment A2KitchenLivingroomBedroomBedroomKitchenLivingroomBedroomBedroomSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 22


What constitutes a risk?Condo-House ACondo-House BCondo-House CResidential AreaSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 23


getUserAccessListFromDevice第 2 章アクセス 制 御 関 数入 力 パラメータパラメータ タイプ 値 説 明token UserToken、必 須— ユーザの 認 証 パスを 表 すトークン。これは、ユーザが login 関 数 を 呼 び 出 して、バックエンド サーバがそのユーザを 認 証 した 後 に 取 得 されます。username String、 必 須 — ユーザ 名 。戻 り 値この 関 数 はユーザ 名 の 配 列 を 返 します。エラーと 例 外システム エラーによって 操 作 が 完 了 しなかった 場 合 は、RemoteException がスローされます。エラーが 発 生 した 場 合 、この 関 数 は null を 返 します。getUserAccessListFromDevice構 文String[] getUserAccessListFromDevice (UserToken token, String dev_id) throwsRemoteException;説 明この 関 数 は、 特 定 のデバイス ID のユーザ アクセス リストを 文 字 列 の 配 列 として 返 します。 各 文 字 列 は1 つのユーザ ID を 表 します。入 力 パラメータパラメータ タイプ 値 説 明token UserToken、必 須— ユーザの 認 証 パスを 表 すトークン。これは、ユーザが login 関 数 を 呼 び 出 して、バックエンド サーバがそのユーザを 認 証 した 後 に 取 得 されます。dev_id String、 必 須 — デバイス ID。戻 り 値この 関 数 はデバイス ID を 返 します。 指 定 したデバイスにアクセス リストがない 場 合 は null が 返 されます。エラーと 例 外システム エラーによって 操 作 が 完 了 しなかった 場 合 は、RemoteException がスローされます。2-4Cisco License Manager 用 Java API リファレンス ガイドOL-13001-04-J


What constitutes a risk?Construction IndustryHoldingCompany AHoldingCompany BHoldingCompany CSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 25


Pricing Key Elements Capital Costs Risk Element Administration Costs Profit Example for Premium CalculationSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 26


Capital CostsPremium CalculationKey ElementsApplicable Capital (e.g. BIS requirements)Interest Rate Level Risk Loading FactorHistory / ExperiencePortfolio StructureRisk AppetiteCollateral Administration CostsAcquisition CostsInternal Costs Profit ElementsEqualization ReservesCat EventsProvision for future InvestmentsSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 27


Premium Calculation ExampleCapital Costs 0.45% - 1%Risk Loading Factor 0.1% - 5%Administration Costs 0.2% - 1%Profit Element 0.1% - 0.2%Total 0.85% - 7.2%Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 28


Underwriting Capital Capacity Character Collateral Conditions Confidence CedantSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 29


Underwriting of Surety & Credit Risks!Suretyship & Credit Insurance are not classical!insurance covers but rather financial productsConsequentlya specificunderwritingapproach is anabsolute must !!!Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 30


Capital Balance Sheet Profit & Loss Account Tax Returns Bank Facilities Available Income & Health of Owner andDirectors Authorized vs. Pain In Share CapitalSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 31


Capacity Work in Progress Work on Hand (Order Book) Machinery / Equipment Human Resources Skilled Engineers Past Experience / Track RecordSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 32


Character Year of Incorporation Reputation of Company Owners & Management Who owns the Company Form of Incorporation Philosophy / Strategy of TopManagement Links & RelationshipsSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 33


CollateralSwiss Re New MarketsCredit & Surety Indemnity Agreement Counter Guarantees Personal Guarantees Letter of Intent Cash / Assets Completion Guarantee from 3rd PartContractor Bank Guarantee Back to Back GuaranteeCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 34


ConditionsSwiss Re New MarketsCredit & Surety Economy Trade Sectors Basic Contract Acts of God, Political Risks, FixedTime & Price, Price Escalation,Arbitration Clause Bond Wording Indemnity Agreement Counter Guarantees Escrow & Pledge AgreementCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 35


Confidence Underwriting Experience No, in case of slightest doubts Careful with cases looking too good tobe true Careful if only limited or verbalinformation is available Why are we approached Who wants to give away what riskSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 36


Cedant Specialized Company Experience Accommodation or ProfessionalUnderwriting Background of Underwriters Corporate Strategy ReputationSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 37


Claims Reason for Claim Handling of Claim Recovery of ClaimSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 38


Reason for Claim Unfair Call of Beneficiary‣ on demand bonds / abstract guarantees Default by Principal‣ Non-performance of principal inaccordance with terms & conditions ofthe basic contract (I.e. breach ofcontract)‣ Default due to insolvency of theprincipal and/or the group of companiesit belongs toSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 39


Handling of Claims Unfair Call‣ If possible (I.e. no abstract guarantee)avoid payment but file court injunction Default‣ Amount of actual damage sustained bythe beneficiary?‣ Payment respectively Completion ofContract?Swiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmicZPage 40


Recovery of Claim Counter-Indemnity‣ Compensation by principal (insolvency) 3rd Party Guarantee‣ Completion guarantee by other principal‣ Counter-guarantee by directors,shareholders and/or outside parties Collateral‣ Cash, SecuritiesSwiss Re New MarketsCredit & SuretyCredit Basic 1 - Suretyship (ARO).pptFebruary 05/srzmic‣ Pledged AssetsZPage 41

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