Risk and Insurance - Ultimate Construction Company UAE Ltd - Case Study Example

Risk and Insurance Name; Institution affiliation; Date; Name of the company with shareholding structure The name of the company is Ultimate Construction Company UAE Ltd. This is a publicly listed company and which has operations across UAE and across the boarders in countries such as Australia and North Africa. The company’s shareholding structure; The company has over 57,000 shareholders who hold over 580 million shares. However, it is worth noting that 75% of the shares are held by the company’s ten largest shareholders. The shareholding is composed of individual, institutional and private and undisclosed holdings investors. Information relating to the company’s ten largest shareholders is given below; Name No of shares % of issued share capital Emirates custody Nominees (UAE) Limited 156,506,000 30% National nominees limited 108,352,158 19% UAE Noms limited 78,332,918 13.5% Emirates life limited 32,000,000 5.5% Abdul Husein 15,000,000 2.6% Kings limited 8,000,000 1.4% Mohamed Abdu 7,000,000 1.2% Mecca limited 7,000,000 1.2% Abu Isaak 3,005,192 0.52 Mohamed Fatah 464,0125 0.08% Activity Ultimate Construction Company UAE Ltd is a leading construction company mainly operating in Australia although it also has operations in Australia and North Africa. The aim of the company is to create best constructions that inspire and enrich lives wherever it operates by observing the highest standards of safety, innovation as well as sustainability. The company’s current projects include civil works such as road constructions as well as private property development projects (Vaughan, 2002). The company has been in operation for the last ten years and has been the force behind many iconic places wherever it operates. Market and competition As stated above, Ultimate Construction Company UAE Limited mainly deals with construction projects both civil and private. In other words, the company’s market for its products include the governments of the various countries in which it operates as well as private individuals and companies who contract it to undertake various construction projects. The governments or the public sector contribute 70% of the company’s markets with main works including construction of roads, public utility facilities, government buildings among other civil works. On the other hand, the private sector usually contracts the company to undertake various construction projects including houses and industries. Thus, it can be concluded that the company has a big market for its products both in UAE and in foreign markets. Competition is intense in the construction industry given that the company has to compete both at the local and international level. It is worth noting that locally, the government also opens its projects for international bidding and hence the company has to invest a lot so as to deliver quality to ensure it continues to win lucrative projects. At home, major competitors include such companies as Nuvo building contracting LLC, Capriole Construction Limited, Simplex Infrastructure Limited among others. At the international level, the company has to compete with such companies as LendLease of Australia, ADCO constructions among others. Thus, though there is a big market for the company’s services and products, the market is highly competitive and to remain relevant in the market, the company always has to deliver the best quality to its customers. Company list of products As stated above, the company mainly deals with various types of constructions. These include civil construction works including construction of roads, buildings, industries, social amenity facilities and housing projects among other construction projects. In other words, the company’s products mainly depend on the customer’s specifications and tastes. Process of workflow/production process from the beginning of the process until selling with related parties as well as insurable risks at difference phases The process of workflow begins with tendering for undertaking of various projects advertised by various potential clients. Before, tendering, the company’s finance department in conjunction with its engineers have to undertake the project’s feasibility and hence ensure it is feasible. After passing all the criteria and the project has been awarded, the company procures all the necessary construction materials. The materials are then moved to site and after all the permits have been secured, the construction work begins. After construction of the project is complete, it is handed over to the client after all the safety requirements have been adhered to. Insurable risks Construction projects involve a lot of risks most of which are insurable. The risks are identified below; i) Most of the time the company has to import some of the construction raw materials or even ship construction equipment oversees. Such raw materials and equipment are faced with the risk of theft or even destruction as they are shipped. They can also get lost. ii) Within one country, equipments and raw materials have to be moved from one site to another at all times and are hence exposed to the risk of destruction or theft while on transit. iii) The company’s vehicles when transporting raw materials and equipment face the risk of being involved in accidents where third parties may be involved. iv) In the construction site, the company’s workers may be exposed to the risk of attacks while the company’s raw materials and equipment may be exposed to the risk of theft. v) During construction works, the workers are exposed to the risk of many forms of injuries including the risks associated with falling, falling objects, cuts among other kinds of accidents. The construction equipment may also break down. vi) There is the risk of the construction projects not meeting the client’s criteria owing to professional errors by the company’s engineers hence leading to litigation and threatening the company’s reputation and hence its ability to be awarded projects in future. Suggested insurance policies Owing to the insurable risks identified above, it has been important for the company to insure itself against these risks. Below are the suggested insurance policies as well as the risks that the policies are intended to insure against. a) Cargo insurance- this insurance is aimed at insuring the company’s raw materials and construction equipment whenever they are in transit. The policy covers such risks as non-delivery of the goods shipped occurring from collision, explosion or even burning (Jared, 2011). Risks insured will also include bad weather that would damage the goods and improper storage by the shippers. b) Employers’ liability insurance policy – this would cover issues related to workers health and safety to cover claims against risks such as employees’ injury or sickness in the course of undertaking the construction projects. a) Professional indemnity insurance –this policy is aimed at covering the company in case its professionals give faulty advice resulting to financial loss for the clients. b) Property insurance policy- the policy would insure the company’s property against such threats as fire and theft. c) Auto insurance policy- the policy will insure the company’s trucks and other vehicles against various risks. d) General liability protection – this policy is aimed at protecting the company from risks that arise from any form of injury including property damage, body and personal injury. e) Public liability insurance – the policy would cover the company against risks that arise when one or their property is damaged owing to the company’s actions. f) Inland marine insurance- this policy would insure the company’s equipments that are frequently moved to other locations against risks that might occur as they are transferred. Selection of insurer There are many insurers in UAE. However, they differ in many respects and hence a number of factors have to be considered in choosing the best insurer for the company. The quality of services offered by the insurer is a major factor to consider. This will also include the insurer’s paying ability or financial strength as well as whether the insurer is an expert in the area that the company wants to insure. Whether the insurance coverage provided will be adequate for the company’s needs and the effectiveness of the premium cost compared to other insurers are factors to consider. Another factor to consider will include the claim paying process and whether there are local offices. Finally, the company has to consider the insurer’s claim refusal record. Based on these factors, the company ought to choose the insurer that best suits it. In consideration of the factors therefore, The Dubai National Insurance & Reinsurance PSC has been selected for the company. This is because despite the insurer being a one stop shop for the company’s insurance needs, it also fulfills the above insurer selection criteria. Thus, the company should be secure having selected the insurer for its insurance needs which ought to ensure that it has smooth flow of operations all year round. Financial statements The following financial statements show the effect of insurance on the company’s profit Ultimate Construction Company UAE Limited Income Statement For the Year Ended 30th June 2015 $000 Revenue $13,280,900 Cost of sales $11,613,300 Gross profit $1,667,600 Other Income $251,800 Other expenses including insurance $1,051,800 Income from operating activities $867,600 Finance revenue $ 17,700 Finance costs $ 137,200 Net finance costs $119,500 Income from investment in other companies $19,900 Profit before tax $768,000 Income tax expense $149,100 Profit after tax $618,900 NB// Insurance expenses for the year amounted to $73,990,000. This means that the company’s profit would have increased by the same amount if there was no insurance. However, owing to the numerous risks that the company is exposed to, the company found it necessary to incur the costs. Statement of financial position Ultimate Construction Company UAE Limited Statement of Financial Position As at 30th June 2015 $000 Current Assets Cash and Cash equivalents $750,100 Loans and cash equivalents $3,631,000 Inventories $1,980,000 Other financial assets $42,700 Current tax assets $8,600 Other assets $83,200 Total current assets $6,495,600 Non-Current assets Loans and receivables $320,100 Inventories $2,124,200 Equity accounted investments $1,235,800 Investment properties $5,994,900 Other financial assets $625,700 Deferred tax assets $305,500 Property, plant and equipment $348,800 Intangible assets $1,444,700 Other assets $63,900 Total non-current assets $12,463,600 Total assets $18,959,200 Current Liabilities Trade and other payables $5,036,100 Resident liabilities $4,080,400 Provisions $328,800 Borrowings $227,300 Other financial liabilities $33,700 Total current liabilities $9,706,300 Non-current liabilities Trade and other payables $1,586,000 Provisions $46,000 Borrowings $2,223,000 Other liabilities $101,100 Total non-current liabilities $4,084,700 Total liabilities $13,791,000 Net assets $5,168,000 Equity Issued capital $1,256,300 Reserves $101,000 Retained earnings $3,810,700 Total equity $5,168,000 Assets to be insured The assets to be insured include the various properties owned by the company including offices. The company’s plant that produces construction materials will also have to be insured. It is worth noting that the company also owns various equipments that need to be insured. Such equipments to be insured include motor vehicles and trucks, front loaders, forklifts, cranes, excavators, bulldozers and backhoe loaders. Also to be insured are the company’s construction materials against the various risks identified above. The company’s workforce is also to be insured against various health and safety issues in accordance to the law. In a bid to determine the assets to be insured and the amount to set aside for insurance, a number of factors will be considered (Niehaus, 2008). The factors include the extent of exposure to the risks being insured against. The value of the assets being insured as well as its remaining life will also be considered. The following table shows the assets to be insured together with the insurance rates and premiums to be paid. Type of assets Value Rate Premium Policy Property $58,000,000 2.5% 1,450,000 Property insurance policy Plant $100,000,000 3% 3,000,000 General liability policy Equipment and motor vehicles $190,800,000 5% 9,540,000, General liability policy, Auto insurance policy Materials $2,000,000,000 2% 40,000,000 Cargo insurance policy, general liability policy, inland marine insurance policy Workers 20,000,000 Employers’ liability insurance policy Total 73,990,000 Total annual premium and payment method In order to fully insure the company’s assets listed above as well as its employees from the risks identified above, the company will have to pay an annual premium of $73,990,000. This premium will be paid in equal monthly installments of $61,658,000 in line with the company’s agreement with the insurer. The company has instructed its bankers to remit the payment to the insurer on a monthly basis through direct transfer. References: Vaughan, T2002, Essentials of risk management and insurance, New York, John Willey & Sons. Jared, B2011, Principles of risk and insurance, London, Rutledge. Niehaus, G2008, Risk management and insurance, New York, McGraw Hill. Read More