Risk management in the insurance industry:Insights for the engineering construction industry

Abstract

A probabilistic framework is developed to analyse a risk management approach adopted by an insurance firm. The analysis shows that when the insurance firm classifies a client as ‘superior’ and ‘most acceptable’, the probability of the insurer having to pay out on those claims is negligible. Even for a policy that is classified as ‘acceptable’, the highest probability of a claim is only 12%. When the probability of a claim is over 50%, the client is considered to be ‘unacceptable’ for an insurance policy. Based on that analysis, the insights that the engineering construction industry can gain from risk management in the insurance firm with respect to project duration and cost are highlighted. It is shown that, in responding to risks and uncertainty, the engineering construction industry should not allocate contingency at a predetermined probability of success for global variables such as project cost or duration as suggested in the literature, but at the input level. It is suggested that the predetermined probability of success value to allocate contingency at the input level should be at least 70%. Then, the contingency available for project cost and duration can ensure a high probability of success in the completion of the project.