Capital Expenditure Versus Revenue Expenditure

In the realm of financial accounting, various classifications exist to determine how to treat values. With reference to expenditure, financial accountants need to know whether to treat it an as asset or expense. Capital expenditure and revenue expenditure are the two fundamental classes of expenditure.

Capital expenditure refers to expenditure on the procurement or enhancement of non-current assets (assets that the business intends to keep for 12 months or longer). Revenue expenditure refers to expenditure that the business incurs either for the purpose of trade or for maintenance of the earning capacity of non-current assets.

The key issue between capital and revenue expenditure is whether it can appear in the Statement of Financial Position (balance sheet) or not. Any expenditure that does not increase the net book value of non-current assets or result in the appearance of a new one on the Statement of Financial Position is an expense. Recall that expenses are deducted from gross profit in the Statement of Comprehensive Income.

Naturally, classifying expenditure as revenue or capital expenditure is important, since it would determine the impact on the assets of the business or its profitability. It is also critical to note that actions on a non-current asset can result in either class of expenditure. For instance, suppose a business purchases a motor vehicle and has it modified to improve its fuel efficiency. In addition to this, during the course of the year, other expenses like insurance and maintenance crop up.

The amount that the business used to purchase the vehicle is capital expenditure because the motor vehicle would now appear on the Statement of Financial Position and the business intends to keep the car for more than a year. The cost of the modification to improve fuel efficiency is expenditure that improves the earning capacity of the motor vehicle and increases its net book value. Therefore, the modification is also capital expenditure and should not be written off as an expense. The insurance and maintenance costs associated with the motor vehicle represent revenue expenditure on a non-current asset.

Although capital expenditure is not charged to the income statement, depreciation on non-current assets eventually account for the capital expenditure over time. Recall that accumulated depreciation decreases the net book value of a non-current asset and the current depreciation expense is charged to the income statement. This helps to reinforce the fair presentation assumption.

The distinction between capital and revenue expenditure is critical in financial accounting as it determines the treatment of the expenditure and how the business' operations are presented.

Capital Expenditure Vs. Revenue Expenditure

Capital expenditures are assets that are acquired to expand business capacity to earn or produce. Costs that are attributed to maintaining earnings or capacity are revenue expenditures.

      Accounting
  Revenue expenditures are noted on income statements and a capital expenditure is placed on       the   
  balance sheet.
      Working capital
  Although capital expenditures are typically machinery or some other physical asset, they       can also  
  include research and development. This is because research and development       expands production 
  ability, earnings and capacity.
      Industries  A capital expenditure in one industry may be a revenue expense in another company. One       example is a
  real estate company that purchases land or buildings for resale. This is not       a capital expenditure, even
  though it is a physical asset, because its purpose is to be       resold.
      Raw materials
   Although raw materials are used in the earnings process, and increasing the amount of raw       materials 
   that are purchased and used may increase production, these are revenue       expenditures.
      Day-to-day
   The day-to-day costs of running the business, including salaries, utilities, repairs,       maintenance, fees, rent
   and taxes are all revenue expenditures.

The Importance of Strong Operations, Capital, Tax, Debt Service and Insurance Reserves

As investors the attraction of keeping cash in our pocket can seem irresistible. When our property is performing well and the cash flow is strong, we are tempted to believe that with so much available cash each month that reserves are not necessary. We can convince ourselves that the risk is not worth the worry or the cost. However, protecting the asset is as important as making the cash flow. Because of this, strong reserves are critical.

The temptation to take reserves and enjoy the cash is strong. Reserves can hold $10,000 or $100,000 or even $1,000,000 captive on relatively small investments. When large sums such as this are involved the temptation to make other use of these funds is strong.

However, a tax lien, the catastrophic loss of a building, the failure to make needed capital improvements can be much more damaging. The failure to fund reserves results in potential catastrophic asset loss and eroded asset value.

In many cases, if taxes are not paid, a property could face a tax foreclosure in a matter of less than 6 months. Tax reserves are a critical to protecting the investors' asset. Immediately behind tax liens, a well run property should maintain reserves to assure insurance is maintained, to guarantee that if occupancy drops or income wanes that interest and principal payments will be kept current, and to assure that needed improvements to the project will go forward.

The purpose of debt cost reserves is obvious in the same way that tax and insurance reserves are easy to understand.

Capital and operations reserves are more easily skipped. Over the course of time, these decisions will insidiously undermine income pushing the potential income of the property downward. If the situation persists long enough and serious enough improvements are not made the property can become unrentable. All at once a quality asset becomes a burden and a loss to the investors. Additionally, if capital reserves are kept steadily, strong the owners and management will have the opportunity to make good choices that instead of preventing value erosion will lead consistent asset appreciation. Truly, the result creates reinforcing positive results just as not funding creates consistently damaging results.

Value focused owners will see to adequate tax and income reserves, well planned debt cost reserves, and steady strong capital reserves. Making this choice protects invest capital and offers the potential of steadily appreciating total asset value - the preferred goal of any serious investor.

Basics of Homeowners and Renters Insurance

Homeowners insurance covers your personal home, including the contents of your home, and any personal belongings you or members of your household use, own, wear or carry-basically everything and the kitchen sink. Many Homeowners policies cover your personal belongings and/or contents anywhere in the world. This insurance coverage is also based on your house's coverage, and there are limits on the losses that can be claimed for certain items, such as cash, furs or jewelry-limits that can be increased with supplemental premiums. Homeowners insurance can help restore or replace what you have lost, and compensate those who have been injured as well. Don't even think about being without it, for the risk is too great. Homeowners insurance rates vary from insurance company to insurer but for the most part take the same things into consideration. Therefore, it is important to know how you, your home and the location you live in affect what you pay for insurance. Homeowners insurance is always a good idea, as homes cannot avoid damage. It's a good idea to get several home insurance quotes to find out what sort of policies and insurance rates you can get for your property. Homeowners insurance helps pay to repair or reconstruct your home and replace personal property due to a covered loss.

Homeowners insurance usually does not cover landslide damage. I have been to many homes that have been damaged by landslides and have only heard of one situation where the homeowners insurance company paid for the loss (after a lawsuit determined that the damage was done by a rock fall and the insurance did cover damage from falling objects).

A form of Homeowners Insurance that many people don't know about is Renters Insurance. Renters Insurance is extremely important for anyone who is renting an apartment, house, or condo. Renters Insurance has both benefits and limitations, but not having it can cause extreme hardship in the event of a loss as Rental Home & apartment owners aren't responsible for the personal belongings or liability exposures of their tenants. Renters insurance coverage protects the tenant from the unexpected and is generally inexpensive, so having it is a no-brainer.

Actual cash value is the amount it would take to repair or replace damage to your home after depreciation. Actual-cash-value coverage reimburses you for the cost of your property at the time of the claim, minus the deductible. Actual Cash Value coverage might not produce the amount of coverage and/or reimbursement that you might expect Actual cash value factors depreciation into the value of your house, while replacement cost covers the cost of repairing and/or replacing damaged parts of your house, which can be more than the depreciated value. You also need to consider the other property you own in your house, such as furniture, appliances, clothing, and more.

If you live in Indiana, Erie Insurance is a great company that provided insurance services to Indiana residents. Erie Insurance has been recognized on the list of Ward's 50 Group of top performing insurance companies. The Ward's 50 award analyzes the financial performance of 3,000 property and casualty companies and 800 life-health insurance companies and recognizes the top performers for achieving outstanding financial results in safety and consistency over a five-year period (2004-2008).

Principles of Insurance

There are certain principles of insurance which could be followed

A large number of homogenous units: A large number of insurance policies are provided for individual members. Insurance given against a vehicle to millions or some other insurances the existence of a large number of people allows the insuring giving companies to benefit from "law of large numbers" which is described as a result that is performed by repeating the same experiment continuously. The law of large numbers has affected a large number of states which has increased a large number of exposure units. Whereas the actual results are increasing that are likely to become to the expected proportions.

Lloyd's of London is famous for giving insurance for the health or life of the actors, underwriters, sports personality and many more. Larger commercial properties have certain polices that may insure exceptional properties which has no homogenous exposure units. Many homogenous exposure units are considered to be insurable.

Calculable Loss: This category consists of two elements one is known as attendant cost and the other is the probability of loss. Probability of loss is driven from experiment and observation of a person's loss while the attendant cost has more to do with a person who holds his chattels and a copy of insurance policy and claims a property under the policy which retains an object or the amount of loss recoverable as a result of the claim.

Affordable Premium: Insurance will not be sold if it is too high, which results to a premium which is large compared to the amount that is offered against protection or the cost of the event is too high. Moreover the premium should not be so high that it would affect a loss to the insurer. If there are no chances of loss then the transaction would be in form of insurance.

Large Loss: This depends on the size of a loss. Insurance premiums have to cover both cost of issuing and the expected cost of losses and also adjusting the losses as well as the administrative policy. The insurance premiums supplies the capital that is needed by assure that is given by the insurer who will be able to pay the claims.

Accidental Loss: Insurance will be given to a person during an accident when the person proves it to be real. In this case if there is a loss in the in an ordinary business then the owner is not liable to be paid the insurance.

Definite Loss: In case of a sudden demise of a person, the members are liable to get the insurance. The other factors that meet these criteria are in case of an accident or workers who are injured at the work places. Similarly, if one has to claim insurance then he has to prove the insurance company about the loss n which the time, place and the loss of the person are taken under consideration. Whereas in case of an occupational disease a person cannot claim for insurance benefits, the reason behind this is occupational disease may involve prolong time, place or cause which is identifiable.

Examples of Capital and Revenue Expenditure

Although the definitions of capital and revenue expenditure provide a clear basis for distinguishing between them, it is always useful to use examples to understand fully how the definitions translate in reality. Capital expenditure is basically expenditure on the acquisition or improvement of a non-current asset. Revenue expenditure is that on the acquisition of tradable assets or mere maintenance of the earning capacity of a non-current asset.

== Acquisitions and costs associated with acquisition ==

Both forms of expenditure can result in the acquisition of assets, but for different purposes. Examples of capital acquisitions include the purchase of an office building and the purchase of a vehicle for business use. However, in acquiring a capital asset, certain costs are incurred, such as carriage inwards, installation costs, import duties and valuator fees. Those costs are included as part of the acquisition cost and form part of capital expenditure as well.

Revenue expenditure acquisitions involve those of trade able assets or assets that can be fully utilized within one accounting period. As a result, the purchase of trade able goods or raw materials is an expense to be written off in the period. Recurring expenditure, such as stationary, also form part of revenue expenditure since these costs are minor and the assets require frequent replenishing or replacement. In addition, an entity might acquire a vehicle or building, but pays rent for it. Such expenditure is of the revenue genre since it is consumed fully utilized in the period.

== Improvement or maintenance ==

The distinction between revenue and capital expenditure is also the distinction between improving and maintaining a non-current asset. Let us use a movie theatre for this example. Assume that the movie theatre is merely repairing old seats and re-upholstering, without increasing the seating capacity of the movie theatre.

Although the benefit of that change would extend to several accounting periods, it is not capital expenditure. This is because repairing the seats does not necessarily improve the earning capacity of the movie theatre. However, if the theatre added more seats, it is improving its asset-not merely maintaining it. In addition, if the movie theatre replaces the old seats with new ones, it can consider this capital expenditure.

== Other examples of the forms of expenditure ==

Depreciation of non-current assets: Revenue Exp.

Insurance, salaries and regular maintenance: Revenue Exp.

Major repairs of a fixed asset that increases its productivity: Capital Exp.

Transport costs for trade able assets: Revenue Exp.

Transport and installation costs for non-current assets: Capital Exp.

The examples of capital and revenue expenditure are by no means exhaustive. What is important is that an entity classifies its expenditure correctly, according to the business context, and consistently, according to prior classifications.

Own Your Own Insurance Business

 Envision your future. What do you see? Is your path free of obstacles, or fraught with difficulties?

With all of the financial information available to people these days, it is often difficult to know what to make of it.

When you work with Capital Resources and Insurance, Inc., you needn’t worry about all the details, because we assume the responsibility for understanding the financial complexities and recommending a course of action that fits your specific needs.

As your dedicated partners, we'll help you improve your financial life today and create a secure tomorrow.

Take Control of Your Retirement Assets and Your Future

Are you "in the know" about this extremely valuable investment tool, the self-directed IRA? Statistics show that there are approximately $4.2 trillion dollars in IRAs in this country and fewer than 4% are self-directed IRAs. Many people are simply not aware that a self-directed IRA can enable them to tap into an amazing potential for growing wealth for their retirement portfolio and future.

Chances are if you are like most people, your retirement money is locked into traditional and often unproductive investments, such as stocks, bonds and mutual funds. You might agree that the volatility of the stock market and resulting losses in the last several years is enough reason to take a look at other alternatives.

Up until now, you may not have realized that you can legally invest your IRA in "alternative" investments such as real estate (domestic and foreign), private placements, tax liens, precious metals and limited partnerships, to mention a few, increasing those retirement dollars exponentially.

Individual retirement accounts were introduced in 1974 with the enactment of the Employee Retirement Income Security Act (ERISA). The rules governing what an IRA can invest in have been in effect and not changed since IRAs were created. The rules only specify where someone cannot invest and there is an unlimited array of investments that fall well within the permissible boundaries. There are only three investments that are specifically not allowed within IRAs: collectibles, life insurance, and capital stock in an S corporation.

So, you may ask, what exactly is a "self-directed" IRA and how do I open one?

A Self-Directed IRA and Diversification

A self-directed IRA puts you, the investor, in the driver's seat, allowing you to freely choose investments from a myriad of asset classes. This is in strong contrast to having a financial institution (bank, brokerage firm) making the decision for you and your future, as they likely have a biased interest in profiting from the limited investments (traditional stocks, bonds and mutual funds) that they offer to you.

A "truly" self-directed IRA is when YOU (with the advice of your chosen professionals) choose your IRA's assets, allowing you to invest in both "traditional" investments such as stocks, bonds and mutual funds, as well as the aforementioned non-traditional investments. Therefore, it need not be an "either or" proposition.

The fact is, if you so choose, you can still hold positions in the stock market with a self-directed IRA, yet branch out to include these non-traditional or alternative investments, diversifying your investment portfolio. It is common knowledge that "diversification" is paramount to any investment strategy!

It is actually quite easy to open a self-directed IRA, as it's a simple matter of deciding on a reputable custodian such as Pensco Trust Company or Equity Trust Company, and filling out an online application. The fees are nominal and clearly disclosed on company websites. These custodians also offer excellent free educational tools and webinars to further enlighten you and get you started on the road to self-directed IRA investing.

After some thoughtful research on the various types of investments that you can now take advantage of, the next and most exciting step is to make your decision on how to proceed with expanding your retirement account! However, we do recommend that you discuss your investment approach with your chosen professionals (CPA, CFP, PA) for guidance as you would with any type of investing.

Real Estate Investing with a Self-Directed IRA

Since our forefathers, real estate investing has been the primary investing methodology that people have employed to successfully amass wealth. Long before the extreme example of the U.S. real estate "bubble" of the last few years, "tangible" real estate investments have brought financial security and wealth to investors for centuries. Yes, real estate investments are indeed tangible, where an investor can actually have a direct effect on appreciative value - unlike stocks and bonds.

According to the National Association of Realtors (NAR), recent statistics show that the housing market has actually rebounded in the last three months. The report says that existing-home sales rose for the third consecutive month with inventory easing and home prices declining less sharply in June 2009.

NAR chief economist, Lawrence Yun, is hopeful about the gain. He said that "the increase in existing-home sales occurred in all major regions of the country. We expect a gradual uptrend in sales to continue due to tax credit incentives and historically high affordability conditions."

Real estate investments in a self-directed IRA are both tax-deferred and tax free, depending on the specific investment vehicle. It is truly amazing that more people do not take advantage of these tax breaks, as statistics show that currently less than 2% of retirement accounts hold real estate as an investment.

It is important to know that you can purchase real estate in your IRA as long as it does not result in "self dealing," which means that you cannot purchase property that you will reside in or do business in. There are also specific IRS prohibitions on purchasing or selling property in your IRA where certain family members may have a percentage of ownership. In learning more about observing IRS regulations, we again suggest guidance from chosen professionals, CPA or ERISA versed attorney to assist you in becoming a successful self-directed IRA investor.

The Benefits of Real Estate Investing in the State of Louisiana

Louisiana and its beautiful, historic city of New Orleans are also actively engaged in the process of rebounding and rebuilding after the catastrophic devastation of Hurricane Katrina in 2005. The real estate market in Louisiana is largely driven by the need to literally rebuild its cities (parishes) and because of an increased housing demand due to the influx of workers, workforce housing is a burgeoning necessity and building projects are rapidly proliferating.

Timing is "optimal" for real estate investors to get in on the unusually lucrative post-Katrina economic environment in the state of Louisiana. As spicy as New Orleans jambalaya, real estate investing is "kicked up" a couple notches in The Big Easy.

The good news for investors in Louisiana and New Orleans is not only due to the extreme market demand, there is the additional perk that investments are enhanced by federal tax credits enacted by what is known as the Gulf Zone Act of 2005, which gives investors hefty tax breaks. Larry Haines, CEO of Road Home Builders and Sunconomy Homes said "residential housing in Louisiana is strong, especially in areas supporting oil field services and offshore drilling. These investment properties are yielding state and federal solar tax credits, depreciation, and positive cash flow that investors aren't getting in most of the U.S. right now."

Road Home Builders, a "green" contracting firm, headquartered in New Orleans, is currently involved in the development of several projects, building affordable, energy-efficient solar homes. These projects target first time home buyers and the need for workforce housing along the Louisiana Gulf Coast, offering significant investment opportunities for self-directed IRA and discretionary income investors.

Here are the six easy steps to start investing with a Self-Directed IRA:

1) Select a reputable custodian/administrator of self-directed IRA's

2) Choose a plan type: traditional, ROTH, SEP, SOLO K and open your account online, by filling out application (print, sign and mail)

3) Research investment asset classes and decide upon investment(s)for diversification

4) Discuss investment strategies and review IRS regulations and tax laws with chosen professionals

5) Submit specific investments to custodian for approval (they make sure that the investment is sound and legal, however, they do NOT make the decision whether it is a good or bad investment, that is up to you)

6) Enjoy watching your retirement account grow, having peace of mind knowing that you are now responsible for the investment decisions about YOUR retirement money and YOUR future

The Golden Opportunity

Real estate investing using a self-directed IRA is a prime investment vehicle right now for both long term and short term investing. With real estate prices and interest rates at an all time low, it is time to "make hay while the sun shines."

As investors, we may never see another golden investment opportunity like this in our lifetimes. NOW is the time to start investing in real estate, using the ultimate tool for your retirement portfolio, the self-directed IRA. Discover the freedom of taking control of your financial future!

Must Read for Future Property Owners-Managers of Apartment Buildings

Owning/managing the property.

Now you have the property. Next step is to decide if you want to manage the property your self, or hire a property management company. If you want to manage the property your self, you should get training from your local apartment association. They have classes to help you. Also, you should read on property management. Don't just jump in and start being a land lord and not know what you are getting your self into, and what demands/requirements are needed.

If you decide the you would like to get a property management they will take 5-10% leasing commission of annual rents. I suggest that you go to http://www.irem.org and find a property management company in your area. Once you have selected a group to call, ask them the following questions (or you can go to their web site and find answers to the questions below):

o How long have you been in business?

o What professional designations do you hold?

o What continuing education programs do you offer your employees?

o Can you call existing clients of theirs?

o What software do you use for managing property and why?

o Can you get a sample management agreement to review?

o What costs are included in the agreement and what is extra?

o How many employees?

o Who will be the main contact? How long have they been with the company?

o What cost saving techniques do you use?

Once you find a property management company, sign them for a 120 day contract to see how they perform. Assign maintenance issue on one of three levels of importance:

1. things that have to be done

2. things that should be done

3. those things that would be nice to have done

Once you find a property management, have the both of you brainstorm and ask figure out, "If some one were to buy your property today, what changes do we think they would make in the first 60 days"?

As soon as you control the property try to get a Cost Segregation Study.

Cost Segregation

The IRS has a ruling that allows commercial-property-owners to increase the amount of accelerated depreciation allowed in a tax year. These savings extend back to property acquired after 1986, and they apply to new or future construction. They also extend to existing buildings under renovation, expansion and leasehold improvements, as well as to property about to be acquired. It can also be used for financial accounting, insurance and property tax purposes. The primary goal of a cost segregation study is to identify all construction-related costs that qualify for accelerated income tax depreciation. Cost segregation is not a tax shelter and it is not tax evasion.

To get the benefits, you must get a "study"

A cost-segregation study analyzes taxes and costs incurred to acquire, build or renovate commercial real estate. Experts/CPA's conduct these services. They break down the cost for the accelerated income-tax schedules. To qualify for a cost-segregation study, property-owners must be taxpayers or must intend to pay taxes. They must also operate as a for-profit entity.
Study costs can range from $10,000 to $100,000, depending on the property's size and complexity. In many cases, however, the benefits outweigh the fees.

These benefits of a Cost Segregation Study, can free up money used for other investments, paying down debt or making capital improvements. If you are interested in this study contact me and I will put in you touch with a credible company that can analyze your situation.

Advantages:

o Considerable return on investments property that do not need to be insured.

o Increased tax deductions for depreciation and reduces taxable income.

o Opportunity to correct misclassified assets and claim "catch-up" tax deductions.

o Ability to achieve faster building and acquisition cost write offs.

o Reduction in insurance costs by identifying the components of the property that do not need to be insured.

o Determine personal property versus real property for write off versus capitalization prior to construction. This allows you to write off these items opposed to capitalizing the assets. This can provide you with huge tax benefits.

o Defers taxes on capital gain amounts until the property is sold.

o Reduces real estate property taxes.

o Reduces federal income tax and increases depreciation.

Running the show

Owning and operating an apartment, is no easy task. There are a lot of procedures on analyzing the property's functionality. When investing in apartments your priority may be one of the three: cash flow, appreciation or tax benefits. The great thing about apartments is that you can have "forced appreciation" by making changes to the property. Having an apartment is owning a business. So with any business, a way to increase revenue is to decrease expenses and to find more ways to earn more income. I have included some tips to benefit you as you attempt to maximize your investment on the building.

Expenses you can expect while owning an apartment:

o Legal services

o Tax preparation

o Office equipment and supplies

o Property management

o Maintenance

o Credit checks

o Advertising

o City business tax

o Property tax

o Insurance

o Capital improvements (big expenses)

o Eviction services

o Utilities

Having proper management in place is key to running a successful apartment property. Depending on your level of time, experience and energy having a property management company oversee the operations may be ideal. Especially if the complex is big. Smaller apartments tend to be managed by the owner (along with an on site manager). Regardless who does the actual work on the property, I have included here a variety of tips to get the maximum return out of your investment.

Fair Housing Rules prohibits discrimination on a variety of things from race, gender, age, disabilities (including mental and physical) marital status, sexual orientation etc. Anybody who deals with potential tenants must follow fair housing laws. This includes owners and property managers.
Be consistent when dealing with potential tenants. Set the same standards across the board. Such as, giving someone a pass, by lowering their security payment, or what you charge for late rent compared to other tenants.

Your rental/lease agreement sets the tone with your tenants. It is best to obtain a contract that a lawyer has written out because it is legal document. The rental/lease agreement should have the names of all adult tenants and they should all sign the rental/lease agreement. This makes each tenant legally responsible for all the terms and conditions. Should someone bail out with out paying rent, or someone violates a term, you can cancel their agreement and have them move.
Your agreement should clearly specify that the rental unit is the residence of only the tenants who have signed the lease and their minor children. This will probably not stop people from moving in with out your screening process, but what it will do, is keep people aware and cautious. They will know if you found out folks where living there with out your screening, they could be asked to move. Every rental document should state whether it is a rental agreement (month to month) or a fixed-term lease (usually it is yearly).

Your lease or rental agreement should specify the amount of rent, when it is due, where to send it and how it's to be paid (check, cashier check etc). For late fees, have when it is considered late and the amount of the fee. Also, have a fee for bounced checks.

The return of security deposits can generate problems. To avoid mistakes your agreement should have the dollar amount of the security deposit. In California, the maximum deposit allowed on an unfurnished property is not more than the amount of two months rent. The maximum deposit allowed on a furnished property is not more than the amount of three months rent. You may use the deposit for possible repairs. The contract with the tenant should state that they may not use it to apply for there last months rent. When they do move, you have to return their deposit in 21 days after they move (in California). If decide to take money out of their deposit when they leave, you will need a report showing the deductions on why.

Clearly set out you and the tenant's responsibilities for repair and maintenance in the lease or rental agreement:

o Their responsibility to keep the rental clean and to pay for any damage caused by his/her abuse or neglect.

o They should alert you of defective or dangerous conditions in the rental property.

o You provide tenants with your work procedure for handling complaints/repair/requests.

o Have restrictions on tenant alterations on their apartment with out your permission, such as adding appliances, painting, etc.

You should include a clause prohibiting disruptive behavior, such as excessive noise, and illegal activity, such as drug dealing.

If you do allow pets, you should identify any special restrictions, such as a limit on the size or number of pets or a requirement that the tenant will keep the yard free of all pet manure. Important rules and regulations covering parking and use of common areas should be mentioned too.

Stay on top of maintenance/repair needs. To avoid problems with tenants, you should make repairs to rental units as soon as you can. Major problems, such as a plumbing or heating problem, should be handled within 24 hours. Always keep tenants informed as to when and how the repairs will be made, and the reasons for any delays. If the property is not kept in good repair, tenants may gain the right to with hold rent, deduct the cost from the rent, sue for injuries caused by defective conditions, and/or move out without needing to give notice. Some situations tenants can sue for the discomfort/distress caused by the poor conditions.

Your local building or housing authority, and health or fire department, can provide information on local housing codes (and penalties for violations).

The following are things you can do to limit crime and reduce the risk that you would be found responsible if a criminal assault or robbery does occur:

o Meet/exceed all state and local security laws that apply to the property, such as requirements for deadbolt locks on doors, good lighting, and window locks.

o Provide a security system that provides reasonable protection for the tenants. To get advice speak with the police, your insurance company, and private security professionals.

o Educate tenants about crime prevention/safety.

o Conduct regular inspections to spot and fix any security problems, such as broken locks, swimming pool precautions or parking lights.

o Handle tenant complaints about dangerous situations, suspicious activities, or broken security items immediately.

o If additional security requires a rent hike, discuss the situation with your tenants. Many tenants will pay more for a safer place to live.

While some of these tactics may be expensive, the money you spend today on effective crime-prevention/safety will be much less if something bad did occur on your property.

Drug-dealing tenants can cause problems. If other tenants feel threatened, the authorities may give you heavy fines and may seek criminal penalties for knowingly letting the situation proceed.
To avoid trouble caused by criminal tenants and to limit your liability in any lawsuits that are filed: do a good job screening your tenants, don't accept cash rental payments, in the rental/lease agreement have it clear that you will evict tenants who deal drugs, get advice from the police on what to look out for.

If you were negligent in taking care of your property and that negligence caused an injury, you could be liable for damages. After all it was your responsibility to maintain the section of the property that caused the accident and if you failed to take steps to prevent the accident, your chances of getting a law suit are increased.

A tenant can file a personal injury lawsuit against your insurance company for medical bills, lost earnings, pain, permanent physical disability, and emotional distress. A tenant can also sue for damage to personal property, which results from faulty maintenance or unsafe conditions (ex their car is damaged).

You can avoid many problems by maintaining the property in excellent condition. By using/having:

o A written checklist to inspect the areas and fix any
roblems before new tenants move in.

o Encourage tenants to immediately report safety or security problems (not just their unit, but through out the property).

o Keep a record of all tenant complaints and repair requests with details as to how and when problems were fixed.

o Twice a year, give tenants a checklist on which to report potential safety hazards or maintenance problems that might have been overlooked. Use the same checklist to personally inspect all rental units once a year.

Here are some tips on choosing insurance:

o Purchase enough coverage to protect the value of the property and assets.

o Be sure the policy covers not only physical injury but also discrimination cases, unlawful eviction, and invasion of privacy suffered by tenants and guests.

o Carry liability insurance on all vehicles used for business purposes, including the manager's car or truck if it's used on the job.

If disputes arise between you and your tenants, try to resolve them without lawyers and lawsuits. You can try to put in your lease/rental agreement that all issues will be brought to a mediator/arbitrator. This can save you money. For information on local mediation programs, call your mayor's or city manager's office, and ask for the staff member who handles "landlord-tenant mediation matters" or "housing disputes." That person should refer you to the public office, business, or community group that handles landlord-tenant mediations.

But if that is not possible and you have a conflict with a tenant over rent, repairs, noise, or some other issue that doesn't immediately bring an eviction, meet with the tenant to see if the problem can be resolved informally. If your dispute involves money, and all attempts to reach agreement fail, try small claims court, where you can represent yourself. This will save significant money.
Limit your exposure to lawsuits. Popular reasons are mold and fair housing. Mold starts with water. It is about prevention, controlling water and moisture intrusion. You should proactively attempt to identify potential sources of water and moisture intrusion before they occur. Such as old roofs, pipes that leak or sealed properly, toilets that don't function correctly. If a tenant claims that mold is effecting them, you should take it seriously.

I once got and this email and I don't know how accurate it is, but it does make you think.

o 5% of the world's population is in the U.S.

o 70% of the world's lawyers are in the U.S.

o 94% of the world's lawsuits are filed in the U.S.

o There is a lawsuit filed every 30 seconds.

One way to protect your self is to form a LLC if you don't have one. The LLC requires payment of an annual fee. It must be run as a business, that is separate from personal finances. I have resources that can get your property into a LLC. Contact me and let me know if you would like to talk to them about your situation.

Finding A Right Contractor

Having contractor's assistance is important in running an apartment building. Picking the correct contractor will make your worries less. Have them meet you in person when they present the bid to you. Observe how their quote looks. This is a proposal, so critique the look and feel of it. Did they put time to put it together, or make it in two seconds? Also, have them physically show you a copy of their business license and ask for a copy of their insurance and bond papers. If they can't, tell them to make like a banana and "split"

Have the contractor give you referrals. With the referrals and ask them do they:

o Return calls in a timely manner?

o Show up for work when he says and on time?

o Keep the job clean as he goes?

o Give consideration to residents?

o Perform inspections thoroughly?

o Alert you to potential maintenance problems?

Ways to increase revenue/save money while owning your apartment:

o Conserve water: Water saving toilets, shower heads, low flow faucets.

o Utilize new technology: System that converts salt into chlorine can cut thousands of dollars in swimming poll cleaning and maintenance costs.

o Bill tenants for utilities.

o Obvious...increase rents.

o Collect rebates and freebies: check with city about rebates on water savings and energy saving landscaping, heat reducing items, solar power panels.

o Close the swimming pool: If no one uses it, close it and fill it with dirt, or cement.

o Trim payroll cost: rather than pay, for a full time manager, have an onsite resident manager who receives free or cut rate rent in exchange for picking up trash, deliver tenant notices, etc.

o Manage the managers: make sure your property management company puts you the owner interest first.

o Hire moonlighters: sub out work, to independent contractors who have day jobs, that can bring an added service to you. Ex, someone who works at Home Depot, works for a city housing authority, or for a large apartment company.

o Automate accounting: get bookkeeping software can help identify unnecessary cost and keep track of income tax deductible expenses.

o Request discounts: you can get discount just by asking your vendors.

o Track vacancies: good data can reveal ways to reduce vacancies. Try doing an exit interviews, to understand reasons why people move.

o Review contracts: an annual review of the cost of all products and services used by the apartment operation can reveal opportunities for savings. Get at least three bids for each service. Work with providers/vendors who specialize in apartments, you may be able to get a lower price, plus they truly understand your needs.

o Cut insurance costs: To save on insurance premiums raise policy deductibles, eliminate unnecessary or duplicative coverage, shop around for cheaper rates, group buildings under an umbrella liability policy or make alterations to the building itself. Let them tell you what the issues are. After knowing that try to change the issue around modify the issue/structure and see if that would change your underwriting score.

o Buy wholesale: Avoid retail when possible.

o Raise rents: be sure to compare rents for apartments that are similar in location, size and amenities.

o Laundry rooms. You can have a company pay you a fee to have their products on your property that they install, you sign a lease with them, they service it and you both share profits. Or buy it your self and have contractors service it.

o Cable/satellite/Internet. Typically providers will sell their service to the owner at bulk at a discount, and then the owner resells the services to the apartment residents at a markup that generates a profit but is still below the retail cost residents would pay individually.

o Monthly pet fee.

o Vending machines.

o Maid services for tenants.

o Security alarms. Tenant will pay extra to have it on their apartment.

o Bicycle racks.

o Pay utility deposits over a 3-6 month period. Get a "between renters agreement" go to electrical company express tenants will/are paying their own electric bills and if they take off/move the electrical company can't cut off power unless it notifies you/property management company.

o Get a large garbage container and empty it less.

o Have maintenance fee clause in rental agreement tenants pay $50 less each month in return for taking care of minor maintenance (this way management will not have to worry about minor things).

o Pay bills with in 10 days and try to get a discount @ least 2%.

o Lease garage storage.

o Have several apartments available for "corporate housing" that is fully furbished and have companies rent out the units for a temporary time period.

o Enforcing late fees.

o Always outline which repairs the company and responsible for up to a certain $amount. Ex have the management company handle any maintenance or repair cost that run less $200.

o Convert a master metered property to a sub-metered.

o Billboards (rent space on your property).

o Provide access to building rooftops for cellular companies.

o Consolidate 2 or more property managers to achieve synergies.

o Protest assessed tax valuations to have them lowered.

o Each time tenant moves out check faucet and toilets for drips.

You can create "forced appreciation" by rehabilitating a run down property and make it more expensive than the purchase price. You could also, convert it into condo's. With instant appreciation, you can buy a property for less than the market value, fix it up, come up with more systems to increase revenue and sell it.

Management tips

o Have photo ID cards for on site staff, residents will feel safer. Especially if the person comes into the apartment to fix something. Having a standard polo shirt is good too.

o Send thank you notes to residents who keep their patio clean. On the flip side, notify them when it is dirty.

o Have tenants able to pay for their laundry by debit card, or have change on hand.

o 1 night a week, stay open to 8 pm. Have manger work one Saturday per month.

o Instead of giving away money for people that pay their rent on time, offer a coupon to a local merchant.

o Send anniversary gifts of occupancy.

o Extend your referral bonus to them for up to 12 months after they move out.

CYA... keeping files on all tenants

o Forwarding address of the tenant to which they have authorized the refundable deposit. This is key to have because if someone skips town and leaves with out paying rent. With this information, you have a person and address to find the person.

o Copy of the deposits form. What deposits were held back, if any, and for what reason (could prove handy if taken to court).

o Residential Lease Agreement.

o Lease terms, amount of rent, how long the resident stayed, what personal property, such as appliances, are included in the property and all deposits taken in.

o Credit Report received when the application was made this is good for recovering rent owed.

o A list of property improvements that were made prior to advertising the rental.

o Correspondence received or sent to the resident during their tenure.

To get forms (applications needed for running a property, check with your local apartment association.

Covered Calls - Extra Income Or Insurance on Stocks You Own?

Covered Calls is a name for an option strategy that is flexible enough so that it can be adapted to different market conditions. It is important that you first decide what type of covered call strategy best fits your personal risk profile. Is your focus simply earning extra income on stocks you already own, or protecting the value of your shares? What you are about to read will show you how.

A Stock Owner Who Wants More Than Just Dividend Income

If this is you, then you're a long term stock holder. You've probably purchased a stock some time ago and hopefully, it's worth more today than when you bought it. Perhaps you have an IRA or superannuation fund and would like to see a greater return on investment? Or maybe you just believe this stock is a good long term investment and want more?

In that case, you need to be aware of a few things. When you sell call options, in return for the premium you receive, you're exposing yourself to the risk of the stock being called away from you - i.e. you may have to sell it at the agreed 'strike price' for the options you have sold. If you've held the stock for a while, there may be capital gains tax implications to consider. You would want to ensure your strike price is greater than the price you originally bought the stock for, otherwise you could make a capital loss. So your decision to implement this covered call strategy will depend on where your stock is today, in relation to when you purchased it.

If today's price is above your purchase price, then this covered call strategy could be a nice way to bring extra income over dividends. The best strategy here, would be to sell call options for the next month out. The reason for this, is that during the last 30 days of an option contract's life, the "time value" in out-of-the-money options declines at an exponential rate. So if you sell call options at a strike price of say, $2.50 above the current market price and within the next month, the underlying stock either goes nowhere, or declines, you get to keep the option premium, or buy it back (to protect yourself from an unexpected price rise) within a few days of expiry, for next to nothing. You have a made a profit from selling high and buying back low, or letting it expire worthless, as the case may be.

You may not be able to do this every month if you want to keep your stock. It will depend on where the current market price is in relation to your original purchase price. You may be prepared to let the stock go, if called away, providing it is above your purchase price. That's your decision. Either way, your one simple fundamental rule if you're an investor and not a trader, is to wait until you can sell call options at a strike price above your original purchase price. That way, you can't lose.

Another use of covered calls for the stock owner, is to provide a form of insurance over your shares. Let's say you own 500 XYZ shares which you purchased for $15 a year ago and the current market price is now $20. You want to hedge your investment in the event of XYZ falling back to $15 or less. So you sell 5 "deep-in-the-money" near month call option contracts on XYZ at a strike price of $15 and receive $5.50 x 500 in premium = $2,750 credited to your account. At the same time, you purchase 5 near month "out-of-the-money" $15 put option contracts on the share and pay $0.25 x 500 = $125. Your net income is now $2,625 less brokerage.

Should the share price fall below $15 before expiry, your put options allow you to sell them for that price, thus protecting you from a catastrophic collapse due to some bad news. You have covered the cost of these put options with the extra $0.50 above the intrinsic value in the $5 ITM call options. If the share price is close to $15 near expiry date and you are nervous about further falls, you may wish to consider selling the next month out deep-in-the-money call options and purchasing OTM put options at the same strike price of say $12.50. Again, you should receive enough premium from the 'deep ITM' call options to cover the cost of the put options plus any potential further capital loss on falling share prices.

The downside of this covered call strategy, is that since you have written deep ITM call contracts, if the stock price is above $15 at expiry date, you are likely going to be called to sell your shares at $15. But you have already received the extra $5 in premium earlier so there is no loss. But if the current market value of the shares has risen to say $24 by now, you have foregone the potential gain on the shares you would have otherwise made. But it's a great choice in a bear market or at what you believe to be the top of an uptrend.

Offshore Private Placement Life Insurance Dynasty Trust - Funding Through Multiple Grantors

Private placement life insurance (PPLI) typically requires a minimum premium commitment of $1 million or more. By pooling their available assets, two or more grantors of (i.e., contributors to) an irrevocable life insurance trust (ILIT) can reach the minimum premium commitment of a PPLI policy. The insured may be one of the grantors, but need not be.

Through creative drafting of the trust document, an ILIT (also known as a dynasty trust) can provide for multiple grantors (contributors) and various beneficiaries. Each of the grantors allocates part of his lifetime gift and estate tax exemption and generation-skipping transfer tax (GSTT) exemption to cover his contribution to the trust.

A tax-efficient method of building wealth in a dynasty trust is the purchase of a private placement life insurance (PPLI) policy that serves as an "insurance wrapper" around investments. As a result, investments grow tax-free during the life of the insured, and upon death of the insured, proceeds are paid to the trust free of estate taxes. PPLI is especially useful for holding tax-inefficient short-term investments, such as hedge funds, as well as long-term high-growth investments, such as venture capital and start-up businesses.

Domestic insurance companies offering PPLI in the U.S typically require a minimum insurance premium commitment of $10 million to $50 million. Offshore insurance carriers are more flexible, but still seek a minimum premium commitment of about $1 million. This means that many potentially interested individuals or married couples from the economic middle class simply cannot enjoy the same investment and tax advantages as rich people.

In a typical PPLI-dynasty-trust scenario, an individual wealthy grantor contributes several million dollars cash or property to an offshore asset protection dynasty trust, and the trust purchases PPLI on the grantor's life. If the grantor cannot afford at least one million dollars, however, PPLI cannot be purchased.

In contrast, when multiple grantors contribute assets to a single dynasty trust, the trust is more likely to have sufficient funds for purchasing an offshore PPLI policy. For example, three hypothetical grantors might each contribute $400,000 worth of assets to a dynasty trust. With $1.2 million of assets, the dynasty trust could purchase an offshore PPLI policy, insuring the life of a suitable individual. Assets within the PPLI wrapper grow free of income and capital gains taxes. When the insured dies, the trust receives the policy proceeds free of income and estate taxes, and beneficiaries receive trust benefits free of estate and GSST taxes perpetually.

The greater investment flexibility of PPLI compared with conventional life-insurance is the ability to invest policy funds in high-return assets, such as hedge funds or start-up companies. Another important advantage of offshore PPLI is the ability of the insurance purchaser to make in-kind premium payments. For example, if one or several grantors contribute stocks, bonds, or business interests to the trust, then the trust can fund the PPLI policy with in-kind assets instead of cash.

In some circumstances, each of several grantors (contributors) will have his own ideas about how to design an irrevocable, discretionary, asset protection dynasty trust and will bring his own list of beneficiaries. Accordingly, the design and implementation of a multi-grantor trust function well when the grantors have common interests and common goals, as might exist among family members. Presumably, the number of beneficiaries increases with the number of grantors, so that trust benefits might become diluted. On the other hand, since more grantors mean more initial contributions and greater trust assets, these factors should balance. In any case, since the trustee(s) of a dynasty trust must possess substantial discretionary authority in order to achieve asset protection, a rigid allocation of benefits among beneficiaries is usually not desirable.

Grantors (contributors) of an irrevocable, discretionary PPLI dynasty trust may benefit (at the discretion of the trustee) from trust assets. As investments in the PPLI wrapper grow tax-free, beneficiaries (including grantors) may benefit from tax free loans of the PPLI policy to the trust. Upon death of the insured, insurance benefits are received tax-free by the trust. The trust could then purchase another PPLI policy to continue tax-free investment growth.

You can count on us. We’re Capitol Preferred

Since opening its doors for business in 1998, Capitol Preferred Insurance Company has been dedicated to providing financial security for homeowners, condo-owners, renters and investors. Our claims handling experience is second to none, having worked through the 2004 and 2005 hurricane seasons, Capitol Preferred has the experience and expertise to get you back on your feet after a catastrophe. Capitol Preferred maintains a Financial Stability Rating of “A” with Demotech  . Currently doing business in Florida and South Carolina, Capitol Preferred uses local, independent agents to market its products..

Welcome to Capital Benefit Services Inc,

Group health insurance doesn’t have to be complicated. We want to provide you with all the pieces to the puzzle to get you headed in the right direction. Let us show you how our customer service, plan designs, premium cost, and provider network can provide the best fit for your company. Take a look around and see what we have to offer!

How to Get Lost Income Insurance

In law and finances, insurance is a form of risk organization above all used to evade next to the jeopardy of a dependent, unsure loss. Insurance is defined as the even handed relocate of the risk of a loss, from one entity to an additional, in switch for payment. An insurer is a company selling the insurance; an insured or policyholder is the individual or entity buying the insurance strategy. The insurance rate is an issue used to decide the amount to be charged for a certain amount of insurance reporting, called the finest. Risk running, the live out of assess and calculating risk, has evolved as a separate field of study and practice.

The deal involves the insured assuming a certain and known comparatively small loss in the form of payment to the insurer in exchange for the insurer's promise to reimburse (indemnify) the insured in the case of a large, possibly overwhelming loss. The insured receives an agreement called the insurance policy which details the circumstances and conditions under which the insured will be remunerated.

Principles
Insurance engaging pooling funds from many insured units (known as introductions) in order to pay for comparatively rare but severely overwhelming losses which can occur to these entities. The insured entities are therefore secluded from risk for a charge, with the fee being needy upon the incidence and severity of the event happening. In order to be insurable, the risk insured alongside must meet certain individuality in order to be an insurable risk. Insurance is a marketable venture and a major part of the financial services industry, but individual entities can also self-insure through saving money for likely future losses.

Insurability
Risk which can be insured by private companies typically go halves seven common individuality.

   1. Large number of similar exposure units. Since insurance operates through pooling capital, the preponderance of insurance policies are provided for entity members of large classes, allowing insurers to advantage from the law of large numbers in which forecast losses are similar to the actual losses. Exceptions include Lloyd's of London, which is famous for underwrite the life or health of actors, actresses and sports figures. However, all exposures will have exacting differences, which may lead to different rates.
   2. Specific Loss. The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life indemnity policy. Fire, automobile accidents, and worker injuries may all easily meet this decisive factor. Other types of losses may only be definite in theory. Job-related disease, for instance, may involve long-drawn-out exposure to injurious conditions where no specific time, place or cause is particular. Preferably, the time, place and cause of a loss should be clear enough that a reasonable person, with enough information, could dispassionately verify all three fundamentals.
   3. Accidental Loss. The happening that constitutes the set off of a claim should be accidental, or at least outside the control of the recipient of the insurance. The loss should be 'pure,' in the sense that it outcome from an occurrence for which there is only the occasion for cost. Events that contain approximate rudiments, such as ordinary business risks, are usually not measured insurable.
   4. Large Loss. The size of the loss must be significant from the viewpoint of the insured. Insurance premiums need to swathe both the predictable cost of losses, plus the cost of issuing and administering the strategy-policy, adjusting fatalities, and supplying the capital needed to rationally assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is small point in paying such costs except the defense offered has real value to a buyer.
   5. Affordable Premium. If the probability of an insured occurrence is so high, or the cost of the event so large, that the ensuing premium is large family member to the amount of defense obtainable, it is not likely that anyone will buy insurance, even if on offer. Further, as the secretarial occupation officially be familiar with in financial secretarial standards, the premium cannot be so large that there is not a reasonable chance of an important loss to the insurer. If there is no such chance of loss, the business deal may have the form of insurance, but not the substance. (in U.S. Financial Accounting Standards Board standard number 113)
   6. Calculable Loss. There are two fundamentals that must be at least admirable, if not formally quantifiable: the prospect of loss, and the helper cost. Probability of loss is usually an experiential work out, while cost has more to do with the ability of a sensible person in control of a copy of the insurance policy and a proof of loss connected with a claim presented under that policy to make a rationally definite and objective assessment of the amount of the loss recoverable as a result of the claim.
   7. Limited risk of catastrophically large losses. Insurable sufferers are in an ideal world self-governing and non-catastrophic, meaning that the one defeated do not happen all at once and character losses are not harsh enough to bankrupt the insurer; insurers may favor to limit their disclosure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Assets constrain insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the U.S., flood risk is insured by the federal administration. In commercial fire insurance it is possible to find single goods whose total exposed value is well in excess of any personage insurer's capital restraint. Such properties are normally shared among several insurers, or are insured by single insurers who syndicate the risk into the reinsurance bazaar.

Why We All Need Insurance

The need for insurance arises out of the risks we all run in the course of living our daily lives. Our lives are constantly in danger through accident or illness; our property may be subject to loss or damage, while losses incurred by others may affect us in some way or another. We also run the risk of causing injury or damage to other people or their property at a subsequent heavy cost to ourselves should we be sued for damages.

There is thus a constant striving for security, for some means of eliminating a risk, reducing it or transferring it to someone or something better able to bear it and deal with the financial consequences. This becomes a matter of growing importance to any individual or Nation as economic life develops because of the increasingly onerous burden of risk.

In ancient times, individual possessions were meager, trade was by simple barter, and life, being 'nasty, brutish and short-lived', was not held to be of any great value. The growth of commerce and industry, plus the introduction of money as a means of exchange, led over the centuries to a more complicated society in which losses not only were more severe in their impact but also became measurable and capable of evaluation. The early merchants could attempt to protect their property by arming themselves and guarding it against robbers, while ships could hug the coastline to avoid the greater perils of the sea, but it was impossible to provide complete protection and so some method and remedy of replacing lost goods at least in financial terms was sought.

Many merchant traders and business owners could build up reserve funds for that purpose, but that would tie up capital which could be used more productively in the business itself, while the sums required might be enormous in the case of a major catastrophe. Again, it would be essential to have several years of successful and trouble-free trading to build up sufficient reserves, so that new entrants to business would be at a disadvantage and the entrepreneurial initiative would be stifled.

The answer to these problems was for merchants to pool their resources to provide central funds out of which losses could be met without disastrous effects upon any on contributor. In time some merchants became particularly interested and skilled in this new area of business and dropped their other occupations to become professional acceptors of risks. Gradually they acquired an understanding of classes of trade and the hazards involved so that they were able to assess the risks inherent in a particular venture and decide what contributions it should make on an equitable basis to the central fund.

There was, as there still is, plenty of scope for individual opinion, expertise and portfolio development in risk assessment. It was not long, therefore, before intermediaries appeared to act as a link between merchants and insurers.

From this it will be clearly seen that the introduction of insurance was absolutely vital in the development of trade as a means of transferring risk. Over the years the insurance industry has also played its part in risk reduction and elimination. By increasing premium rates, imposing excesses or asking an insured to carry a part of a risk himself, it has encouraged the improvement of 'poor' risks. The use of trained surveyors to inspect properties proposed for insurance has also resulted in many recommendations for increased security provisions and better fire protection systems.

The inspection services provided by engineering offices reduce the chances of loss or damage. In a more general sense, leaflets and films produced on a range of topics by the insurance associations help to educate the public to be aware of the existence of hazards, especially in the home. A Swiss company even sponsors keep-fit facilities as an encouragement to better health. Insurance-financed research, such as at the Motor Vehicle Research and Repair Centre at Thatcham, sponsored by the Association of British Insurers, affects the design and the repair of cars.

Although the development of insurance was furthered mainly by the desire to cover property lost at sea, in time fire insurance, life assurance and a whole range of other classes were introduced to meet the needs of the day. In recent times, much greater insurance capacity has had to be found owing to the introduction of huge values for such symbols of modern technology as the jet airliner and the super tanker, the phenomenal growth in liability risks through, for instance, nuclear power stations or pharmaceutical manufacture, and the effects of natural disasters such as earthquakes and typhoons on developed communities.

This has greatly accelerated the development of the reinsurance market as a back-up to direct insurers as has the increasing nationalism of countries which see insurance funds as a prime national asset and restrict their exportation by foreign insurers. It has also led to a need for highly qualified brokers to deal between clients and insurers, and insurers and re-insurers. The modern worldwide insurance market is thus an immense and complex industry, without which modern life would hardly be possible.

The reason why we need Insurance today and its value to the community can be summed up as follows.

It spreads the cost of losses over all those exposed to risk, rather than those who actually suffer loss, thus providing security for a minimal cost. Insurance reduces the need for individual reserve funds, thus freeing up capital for productive use elsewhere.

From its own accumulated funds Insurance provides investment capital for governments and industry. Current Government borrowing is substantially underwritten by Insurance Companies who have bought the Gilts.

Insurance encourages loss-prevention activities, thus helping to create a safer society for us all. The UK insurance market, in particular, gains about 70 per cent of its non-life business from abroad so that it is a valuable 'invisible' exporter, which leads to a better standard of living.

Deposit insurance, capital requirements, and financial stability

This paper assesses the effects of insurance and capital requirements on assets' equilibrium returns in a capital-asset-pricing model in which intermediaries possess better information than the public about the yields on a set of assets. Equilibrium returns depend on two risk premiums that intermediaries incur on their liabilities: an explicit premium that reflects the public's view of the risks inherent in intermediaries' assets and an implicit premium that reflects intermediaries' risk of losing a share of their rent by leveraging their capital. Insurance reduces intermediaries' cost of funds, thereby reducing risk premiums on assets and stabilizing equilibrium returns when the public's assessment of yields changes. Because fair insurance premiums typically are small compared to intermediaries' own implicit premiums, any subsidy that low insurance premiums might confer does not induce intermediaries to increase their leverage excessively. Greater capital requirements increase intermediaries' implicit risk premium and diminish their capacity to stabilize equilibrium returns. When the yields of assets fall significantly, both insurance and capital requirements can precipitate disintermediation abruptly. This disintermediation can occur most frequently when intermediaries must maintain their scale of operations in order to earn their rent. Because financial stability ultimately depends on the stability of returns on capital goods, macroeconomic policy ultimately underwrites the lower cost of capital promised by insurance and the security promised by capital requirements.

Welcome to Oriental Capital Assurance Berhad

Oriental Capital Assurance Berhad (OCA) had been amongst the prime market players in the country with its beginnings dating back to pre-war period where several leading insurers in the Orient established their businesses onto our shores. Our insurance products & services include:

  Motor Insurance   ,    Fire Insurance
  Health Insurance   ,    Marine Insurance
  Dental Insurance    ,   Engineering Insurance
  Personal Accident Insurance    ,   Other Insurances
  Smart Partnership    

Marine Insurance - Reinsurance Cost Pressures - 2009

Reinsurance, and in particular treaty reinsurance is a fundamental part of any insurers' internal risk management plan.

The protection of the company balance sheet and capital base from extremes in loss frequency and severity or aggregations is of critical importance to the viability of an insurer.

Reinsurance is a global business heavily intertwined with the trade, commerce and finance industries of most, if not every nation on earth.

Events of significance to, or which impact on the reinsurance industry will affect all insurers to some degree.

Recent events may combine to have a sizeable impact on 2009 reinsurance renewals.

Hurricanes Gustav & Ike

They did not have the same news profile as that attributed to Katrina and the subsequent flooding of New Orleans but, the most recent loss estimates suggest that Gustav & Ike will contribute significant claims to reinsurers. In particular, the oblique angle at which Gustav approached the Gulf Coast as it produced a greater than anticipated impact on the rather dense concentration of oil and gas facilities in that region.

Recently reported figures suggest a combined industry loss from Gustav and Ike in the US$20 - $25bn range (A$28 - 35bn). Losses of this magnitude will put pressure on many insurer and reinsurer margins.

Global Credit Crisis

The sub-prime mortgage problem in America has put the international banking industry in the spotlight. Some have failed and many forced to merge or seek funds from the State. The supply of credit has evaporated or become prohibitively expensive as inter-bank lending ground to a halt. In addition the dive in world share prices will bring ratings, valuation and capital adequacy pressures to many other companies across all market sectors.

Introduction Of more immediate concern to the Insurance Industry is the potential for capital to disappear or be re-directed away from reinsurance. In addition, poor investment decisions may have a profound impact on otherwise secure businesses and downgrades may result where ratings agencies are obliged to delve more fully into any affected company.

Impact on Reinsurance

Reinsurance cost pressures will develop due to:

o Reinsurer difficulties in sourcing new capital and/or an increased cost of capital.

o Capital Market demands for increased returns.

o Capacity restrictions.

o A flight to quality (of security) - cedants to reinsurers and vice versa.

o Reduced return on investments.P

o Write-downs in value of investments.

Recent comment from reinsurers suggests an upward pressure on treaty pricing for the December 2008 renewal season with flow on effects to insurance contracts during 2009.

What is RTI (Return to Invoice) GAP Insurance?

RTI Gap Insurance is a vehicle protection insurance plan that fills the financial deficit often left when insurance company settlements are lower than expected upon a total loss insurance claim. GAP insurance is not a replacement for existing motor insurance policy, but a valuable supplement that protects you against serious financial loss if your car is written off.

Even if you have fully comprehensive motor insurance, your motor insurer will almost certainly only offer you the current market trade value for your vehicle at the time of a claim, leaving you with a shortfall of potentially several thousand pounds. In other words, the insurance pay-out is nowhere near enough to replace your vehicle with the same and in some cases, settlements are not even enough to pay off your existing finance agreement.

Return to Invoice GAP Insurance does exactly that, it pays you out to the original Invoice selling price of your vehicle by effectively "topping up" your main car insurance payout with the amount required to return you back to the total sales price as detailed on your original invoice provided by the supplying dealer.
How does RTI GAP Insurance work?

In the event of your vehicle being written off, RTI GAP Insurance will pay the difference between your Motor Insurance Payout and the amount that you originally paid for your vehicle.

RTI GAP Insurance is available for new or used vehicles with a value of up to £80,000 and must be taken out no later than 90 days after you took delivery of the vehicle.
Example
Let’s say you purchase a vehicle for £29,995.00

Two years later, the vehicle is written off and your motor insurance company offer you only £20,000.00 as a settlement.

If this happened, RTI GAP Insurance would pay the £9,995 difference between your Motor Insurance payout (£20,000) and the original invoice price you paid for the vehicle (£29,995).

If you have purchased the vehicle by way of a Finance Agreement, in most cases (not all) receiving the full original invoice price back will allow you to clear the remaining balance of your finance agreement and have money left over to put towards a new vehicle.
For more information, or if you would like a quote on this policy and others please click on the link below, you can also view all the policy terms and conditions.

Solvency II - Will Investor Community and Policy Holders Benefit From the New Regulatory Directive?

Solvency II is a new framework developed by the European Commission which will update the existing outdated Solvency I regime.

The European Parliament approved the Solvency II framework directive on 22 April 2009 and it is now scheduled to come into force on 31 October 2012. Solvency II will result in one of the largest changes ever experienced by insurance industries across Europe and will change capital requirements for insurance companies. The change could be compared with the way Basel II changed capital requirements for banks.

This article describes the far reaching implications of the Solvency II program implementation for both the investor community and policy holders.

Current regime.

The current solvency regime is outdated since it was created in the 70's with some small changes as from January 2004 (Solvency I). According to the Solvency I directive the required solvency margin is set to: Life: 4% of the reserve and 0.3% of risk capital. Non-life: percentage of premiums, namely 18% of the first 10 million and 16% of the remainder.

This situation does not reflect risk properly and in some cases current rules can actually conflict with best practices in risk management. For example a company that increases its non-life premiums with no changes in liabilities reduces its risk of insolvency, but its capital requirements would increase.

Why Solvency II?

The main objective of (re)insurance regulation and supervision is adequate policyholder protection. Other objectives such as financial stability and fair and stable markets should also be taken into account but should not undermine that main objective.

The change in the required capital ratio for individual companies will depend on their own risk profile. Companies with lower risk will have significantly lower solvency requirements.

In particular, capital requirements will reflect the specific risk-profile of each (re)insurance undertaking. Insurers that manage their risks well - because they have rigorous policies, use appropriate risk-mitigation techniques, or diversify their activities - will be rewarded and allowed to hold less capital than under the current EU regime. On the other hand, poorly managed insurers, or insurers with a larger risk appetite, will be asked to hold more capital in order to ensure that policyholder claims will be met when they fall due.[1]

The Three Pillars of Solvency II

Solvency II adapted the same pillar structure as Basel II.

Pillar I determines future "target capital" and "safeguard capital" requirements and provides quantitative requirements.

Pillar II defines more qualitative requirements, the internal risk controls, and the role of supervisors.

Pillar III installs sound risk management by disclosure, and transparency requirements introducing control by the market and consumers.

Key market drivers:

The following market drivers have been identified during market research conducted by Capgemini: consolidation/ M&A, new products, distribution, cost control and, profitability, regulatory and investor pressures on risk provisions, capital markets volatility, outsourcing non-core business.[2]

The current business environment requires quicker ROI, speed to market and transparency.

The future conditions will create a consistent view on solvency measures across all parties. The main measurements are:

MCR - Minimum Capital Requirement:

A level of capital below which ultimate supervisory action would be triggered

SCR - Solvency Capital Requirement

- Standard Formula
- Internal Models

A level of capital that enables an institution to absorb significant unforeseen losses. It also provides a reasonable assurance to policyholders.

Capital adequacy: pillar 2 and 3 assessment.

The starting point for the adequacy of the quantitative requirements in the (re)insurance sector is the solvency capital requirement. Therefore supervisory authorities may require more capital only under strictly defined exceptional circumstances following the Supervisory Review Process.

Lessons from Basel II:

The main lesson learned from the experience in the Basel II program implementation is that the whole project is not just a risk modeling exercise; business should take a driving seat. The Program Structure and Governance is one of the key areas to address, along with other crucial areas - definition of Technology Strategy, Data management, Pillar 2 and ERM implementation.

Differences between Solvency II and Basel II:

The main difference is the requirement that Solvency II models and risk management systems be truly integrated into the firm's business decision process. That will be assessed during supervisory visits and interviews and through documentation - i.e. do the Board and relevant committee papers and minutes clearly indicate that capital and risk considerations have been fully communicated and incorporated into decisions.

Consequences for supervisors and rating agencies.

Supervisors have the power to enforce additional capital requirements.

Supervision shall be based on a prospective and risk-oriented approach. Solvency II therefore adopts an economic risk-based approach which allows for a system that reflects the true risk profile of (re)insurance undertaking... particular care has been taken to ensure that the new solvency regime is not too burdensome for small and medium-sized (re)insurance undertakings.[3]

Rating agencies are also actively involved, by focusing on the ability of insurance companies to quantify and manage risk. The rating analysis contains nine elements. Two of these - management and corporate strategy, and enterprise risk management (ERM) - have similarities with Solvency II Pillar 2. Four further elements; capitalisation, investments, liquidity and reserves, are more aligned with Pillar I.[4]

The view of industry associations.

One of the top priorities identified by both the CEA (European assurances commission) and CRO forums is valuation of insurance liabilities.In this area two main methods have been identified; Market value liabilities (MVL) -Definition: 'The value at which the liabilities could be transferred to a willing, rational, diversified counterparty in an arms' length transaction under normal business conditions (= no fire sale or 'large volume' discounts)'.

The MVL can be decomposed into two component parts:

1. The value of the Financial Components (FC)-incorporating 'best estimate' actuarial assumptions

2. The value of Non-Financial Components (NFC), that covers the uncertainty of those non-financial actuarial risks.

Each component should be valued using an appropriate cost of capital for all risk, not through the use of a common Weighted Average Cost of Capital (WACC).

The value of hedgeable risks should be determined by mark-to-market approaches, i.e. where market prices can be observed they should be used; this is conceptually identical to a best estimate plus market value margin (MVM) approach, except that in this case the observed market price already includes the MVM

o The value of non-hedgeable risks is determined by an appropriate mark-to-model approach:

For non-hedgeable insurance risks, liability values are determined as best estimate plus MVM based on a 'cost of capital' approach

Next steps:

Recently some insurers participated in Quantitative Impact Studies (QIS), the last one being QIS4. These studies are used to test the design and calibration of the future European Standard formula. Participation is voluntary and allows firms to obtain an early indication of work needed and influence the Solvency regime.

A key objective of QIS4 was to study the effect on the own-funds of insurance

undertakings and groups. The overall quality of response was high and most firms completed at least the main data input items in the spreadsheet.

The next year will present the next big milestone for insurers. Firms must be able to demonstrate that they satisfy the dry run entry criteria and have made significant progress towards meeting internal model requirements. Firms must also be in a position to articulate the results of their gap analysis and plans to action.

Conclusion:

The EU Commission President Jose Manual Barroso said recently:

"Solvency II will help protect policy holders from bad practice. It will help shield our economies against a repeat of the disastrous excessive risk taking by financial institutions, including certain insurance operators, that has contributed to the global crisis."

The main benefits for stakeholders such as investors, customers/policyholders, supervisors are the following:

* Establishment of a more competitive single market
* Better product pricing
* Increased efficiency in the use of capital and improvement of profitability
* Shifting from volume based solvency requirements to risk based rules which will benefit all stakeholders.
* Closer alignment between the insurance companies, regulators and rating agencies can only be beneficial to all stakeholders.

Insurers applying best practice will be further rewarded by investors, market participants and consumers.[5]

The firms which will take early actions can gain an advantage against competition and increase their shareholders value.

References:

1. CEIOP. Solvency II directive.

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Capital Expenditure Versus Revenue Expenditure

In the realm of financial accounting, various classifications exist to determine how to treat values. With reference to expenditure, financial accountants need to know whether to treat it an as asset or expense. Capital expenditure and revenue expenditure are the two fundamental classes of expenditure.

Capital expenditure refers to expenditure on the procurement or enhancement of non-current assets (assets that the business intends to keep for 12 months or longer). Revenue expenditure refers to expenditure that the business incurs either for the purpose of trade or for maintenance of the earning capacity of non-current assets.

The key issue between capital and revenue expenditure is whether it can appear in the Statement of Financial Position (balance sheet) or not. Any expenditure that does not increase the net book value of non-current assets or result in the appearance of a new one on the Statement of Financial Position is an expense. Recall that expenses are deducted from gross profit in the Statement of Comprehensive Income.

Naturally, classifying expenditure as revenue or capital expenditure is important, since it would determine the impact on the assets of the business or its profitability. It is also critical to note that actions on a non-current asset can result in either class of expenditure. For instance, suppose a business purchases a motor vehicle and has it modified to improve its fuel efficiency. In addition to this, during the course of the year, other expenses like insurance and maintenance crop up.

The amount that the business used to purchase the vehicle is capital expenditure because the motor vehicle would now appear on the Statement of Financial Position and the business intends to keep the car for more than a year. The cost of the modification to improve fuel efficiency is expenditure that improves the earning capacity of the motor vehicle and increases its net book value. Therefore, the modification is also capital expenditure and should not be written off as an expense. The insurance and maintenance costs associated with the motor vehicle represent revenue expenditure on a non-current asset.

Although capital expenditure is not charged to the income statement, depreciation on non-current assets eventually account for the capital expenditure over time. Recall that accumulated depreciation decreases the net book value of a non-current asset and the current depreciation expense is charged to the income statement. This helps to reinforce the fair presentation assumption.

The distinction between capital and revenue expenditure is critical in financial accounting as it determines the treatment of the expenditure and how the business' operations are presented.

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The Importance of Strong Operations, Capital, Tax, Debt Service and Insurance Reserves

As investors the attraction of keeping cash in our pocket can seem irresistible. When our property is performing well and the cash flow is strong, we are tempted to believe that with so much available cash each month that reserves are not necessary. We can convince ourselves that the risk is not worth the worry or the cost. However, protecting the asset is as important as making the cash flow. Because of this, strong reserves are critical.

The temptation to take reserves and enjoy the cash is strong. Reserves can hold $10,000 or $100,000 or even $1,000,000 captive on relatively small investments. When large sums such as this are involved the temptation to make other use of these funds is strong.

However, a tax lien, the catastrophic loss of a building, the failure to make needed capital improvements can be much more damaging. The failure to fund reserves results in potential catastrophic asset loss and eroded asset value.

In many cases, if taxes are not paid, a property could face a tax foreclosure in a matter of less than 6 months. Tax reserves are a critical to protecting the investors' asset. Immediately behind tax liens, a well run property should maintain reserves to assure insurance is maintained, to guarantee that if occupancy drops or income wanes that interest and principal payments will be kept current, and to assure that needed improvements to the project will go forward.

The purpose of debt cost reserves is obvious in the same way that tax and insurance reserves are easy to understand.

Capital and operations reserves are more easily skipped. Over the course of time, these decisions will insidiously undermine income pushing the potential income of the property downward. If the situation persists long enough and serious enough improvements are not made the property can become unrentable. All at once a quality asset becomes a burden and a loss to the investors. Additionally, if capital reserves are kept steadily, strong the owners and management will have the opportunity to make good choices that instead of preventing value erosion will lead consistent asset appreciation. Truly, the result creates reinforcing positive results just as not funding creates consistently damaging results.

Value focused owners will see to adequate tax and income reserves, well planned debt cost reserves, and steady strong capital reserves. Making this choice protects invest capital and offers the potential of steadily appreciating total asset value - the preferred goal of any serious investor.