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Investigating The Effectiveness Of Insurance As Risk Management Tool In Construction Industry
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
No
construction project is risk free. Every construction project, large or
small, involves risks with varying impact. The construction industry is
subject to more risk and uncertainty than many other industries
(Flanagan and Norman, 1993). The process of taking a project from
initial investment appraisal to completion, and into use, is complex. It
requires a multitude of people with different skills and interests and
the co-ordination of a wide range of disparate, yet interrelated
activities. Such complexity moreover, is compounded by many external,
uncontrollable factors. Risk may hinder the successful completion of a
project by causing time and budget over-run, and/or quality default.
Construction
insurance is used as a collective term to describe various types of
policies to protect construction works, erection and operation of
machinery. Traditionally, it is assumed to be only limited to the
construction stage. However, the project is a whole life process, which
includes a feasibility study, a call for tender and evaluation of
tenders, an award of contract, construction and erection phases, and a
take-over and maintenance period. Many researchers (Palmer, 1996; Bunni,
2003) discussed all possible insurance policies during the whole
project process to build an overall picture of construction insurance.
The
Oxford Advanced Learner‟s Dictionary (1995) defines risk as the “chance
of failure or the possibility of meeting danger or of suffering harm or
lossâ€. In construction projects, a risk may be defined as the
likelihood of a detrimental event occurring to the project. Since the
objectives of construction projects are usually stated as targets
established for function, cost, time and quality, the most important
risk in construction is failure to meet these targets. Within the scope
of management and decision theory, research in construction and project
risk management began in 1960‟s (Guilin, 2004). Risk management is
defined as a set of methods and activities designed to reduce the
disturbances occurring during project delivery (Skorupka, 2003). It can
also be defined as the structured set of processes aimed at identifying,
analyzing and responding to project risks. It includes maximizing the
results of positive events and minimizing the consequences of negative
events (PMBOK Guide, 2000). According to Gray (2000), risk management is
a proactive approach rather than reactive. It is preventive process
designed to ensure that surprises are reduced and negative consequences
associated with the undesirable events are minimized. Successful
management of project risk gives the project manager better control over
the future and can significantly improve chances of reaching project
objectives on time, within budget and meeting required technical
(functional) performance.
Insurance is a risk transfer technique of
passing the responsibility of risks to another party. Risks can be
transfer either through contracting or by insurance which changes an
uncertain exposure to certain cost. Transferring risk does not
necessarily reduce the effect the risk would have or the likelihood of
its occurrence but only passes the responsibility to another party. From
the legal viewpoint, insurance allocates the risks to which the project
is exposed, between the parties. Dickson (1983) highlighted insurance
as a risk transfer mechanism that the insured transfer from a state of
uncertainty to a state of certainty at the certain cost of the insurance
premium. It is a cost-smoothing mechanism, in which contractors
exchange a regular known annual premium for an unknown potential loss.
This study investigates the appropriateness of insurance as a risk
management tool in the construction industry.
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ABSRACT - [ Total Page(s): 1 ]The nature of construction business is risk versed. Most forms of construction contract recognized the use of insurance as risk management tool. Few studies however, evaluates its effectiveness as risk management tool. This study investigated the efficacy of insurance in curbing risks in construction project delivery. The objectives were to identify insurable risks in construction project delivery, identify prevalent insurance policies in the construction industry, and to determine their level o ... Continue reading---
