Construction Insurance and Risk Management

Abstract

Construction industry all over the world is infested with innumerable uncertainties and risks. Contractors have to deal with and manage risk on daily basis. Time and cost overruns are the ultimate consequences of this peril. However, in order to ensure profits and client satisfaction, this predicament must be dealt with efficiently and effectively. There are three basic ways of risk handling. A contractor can mitigate, transfer or own the risk. The conventional practice is to own it by defining a contingency amount for the project. This may be a temporary solution but does not provide comprehensive coverage for all the risks involved. Contingencies are often miscalculated and misused by the contractors especially in this part of the world. Another technique to handle the risks associated with construction is to employ insurance. General observation reveals that construction insurance in Pakistan is not being successfully adopted by the contractors Insurance has the potential to tackle uncertainties and risks in a profound manner. By employing insurance the contractor can transfer certain risks to a third party i.e. The Insurance Company which is better suited to deal with it. Against this guarantee of compensation, the insurance companies charge a certain premium amount. The premium value corresponds to the extent of coverage and the number of risks involved in a particular project. Before we started the project we had assumed that insurance was not being successfully employed in Pakistan due to high premium rates and lack of company’s providing construction insurance. In order to better understand the mechanism involved in calculating insurance premiums we have developed our own insurance model and compared the results with data obtained through our industry surveys. This has enabled us to gain an insight in to the problems and shortcomings afflicting the industry in general.