market risk transfer strategies

There is no “standard” builders risk insurance policy in the marketplace (all projects differ), so the builders risk contract should be read carefully. The most common forms of risk transfer are lump-sum cash-outs to terminated vested (TV) participants; and annuity purchases for retirees. up more than 50% of the pension risk transfer market, demonstrative of their status as a strategic investment of choice. We particularly explore available optimal financial risk transfer techniques, including various insurance products, and methods for transferring the financial consequences of risk realization through contractual agreements. Thus, monitoring workmanship was to be taken on as a normal part of monitoring the quality of work performed while doing business, and this was viewed as being under the control of the contractor. Additionally, construction projects are very labor intensive and often are performed under harsh conditions, adding to the riskiness of contracting. If the contractor’s completed work or product is faulty, or if the work is not what was contractually specified, the contractor’s unendorsed CGL policy will generally not cover the costs to remediate it (but see the builders risk section for in-progress claims). This differs from Coverage A and B where the insured needed to be responsible for the injury to be covered. A Surety assures the project is completed according to contract [8]. Additionally, many subcontractors are small and potentially undercapitalized, so that even if they sign a hold harmless agreement, they may not be able to live up to the assumed financial responsibility agreement (leaving no effective way to enforce it). With a large-scale project, (e.g., $50–100 million) there are savings by having all contractors or subs covered under a single policy. Enhanced Risk Strategies Frameworks. 4th 1311, 1325 (2011), sited in [15]. RACE TIMERS. Unexpected delays create unexpected losses for owners, developers, construction companies, or others with a stake in the timely project completion. Like builders risk insurance, it can be project-specific if the contractor is only doing design-build on some projects. Title: Proven_Strategies_For_Effective_Risk_Transfer Author: Anderson Kill & Olick, P.C. An individual primary insurance contract covers pre-specified financial consequence of a risk realization (stated in the contract) from above the specified deductible up to policy limits. Usually a company will hire a third-party administrator to assist with claims adjusting and claim payments. Corporate Hedging and Risk Management is comprised of many facets. Insurance expense is the amount that a company pays to get an insurance contract and any additional premium payments. Several types of WC rating plans are available for larger sized insured. Speculative risks, such as investment in the stock market or contracting to build a project in the hopes high profitability, either can result in losses or gains. There are, however, different types of construction robots now poised to revolutionize parts of construction. Another distinction between experience rating and retrospective rating is that in retrospective rating the contractor does not know what their premiums will be until the end of the premium period. We then examine various important construction risks and insurance solutions to the transfer of their financial consequences. Construction contracts are often written with incentive clauses based on the contracted for completion date. Reinsurance companies, also known as reinsurers, are companies that provide insurance to insurance companies. Different Market Methods for Transferring Financial Risks in Construction, Risk Management in Construction Projects, Nthatisi Khatleli, IntechOpen, DOI: 10.5772/intechopen.84748. Primary insured status means that the subcontractor’s policy becomes the primary policy (pays first) instead of the contractor’s own policy when a claim is filed, and it will pay up to the policy limits of the subcontractor before tapping any of the contractor’s own insurance policies. Once identified, risks can be avoided, retained or transferred (The A-R-T of Risk Management). Your landlord doesn’t control who comes in and out of your business and wants to make sure that your insurance is going to take care of him if one of your guests falls down his stairs. The marketplace is dynamic, and transfer options for construction risks are continually evolving. A relatively recent product in the professional liability insurance marketplace (Contractors Professional Liability Insurance developed in the 1990s) protects contractors who engage in design-build work. A liability insurance policy such as the CGL policy, for example, will pay any liability claim amount (damages) that meets the conditions of the contract plus litigation costs up to the specified policy limits. Among all occupations in the USA in 2017, construction labor workers ranked as the ninth highest in terms of the number of workplace injuries and illnesses [5], and contributed 2.6% of all workplace injuries and illnesses in the USA. Risk transfer is commonly confused with risk shifting. This means they cannot use the legal system as a remedy for costs or damages that reduces costs to the employer [2]. To show this, the contractor may have to hire an expert, and this may be covered by the insurance. We examine these in turn. This section considers which types of construction risks are amenable to insurance and the types that are not. The existence of commercial insurance brokers goes a long way in preventing customers from getting lost in the sea of trustworthy and unscrupulous insurance providers. investing in the pension risk transfer market as an organic growth opportunity. Purchasing derivative contracts is a method of risk shifting. For example, consider a client that signs a contract with an indemnification clause. Risk Transfer: A Strategy to Help Protect Your Business 4. Because of this tilting and sinking, the tower has a minimum $200 million in repair costs, plus lost property value [9, 10]. Licensee IntechOpen. Finally, MNEs can mitigate sources of risk using capital structure, contracts and network-based strategies. For example, there are now professional liability lawsuits against the structural engineers, architects, and developer in the sinking and tilting 58 story Millennium Tower completed in 2009 in San Francisco, California. Usually excluded are ordinary wear and tear, corrosion and rust, mechanical breakdowns, employee theft, acts of war and terrorism, and damage due to faulty workmanship, materials, or planning. Rather liability coverage comes into play when the contractor’s (insured) defective materials or work cause injury to property other than the insured’s own work or products.” See Clarendon America Ins. However, when subcontractors fail, general contractors face a host of challenges, including project delays, costs associated with work stoppage, complexities arising from trying to replace the subcontractor and potential reputation damage. Purchasing insurance is a common example of transferring risk from an individual or entity to an insurance company. It describes situation when we transfer the risk to another person or entity such as insurance agency. The primary job of an actuary is to analyze risk and the costs associated with risks and uncertainty. With an insured’s increase in claims, insurers may make policy changes to keep the insurance viable, such as excluding coverage for problematic trades (e.g., framing) ([14], quoting Rose Hoyle). These endorsements can be recommended by the contractor’ insurance broker [19]. The objective of the WC system is to provide a mechanism to compensate workers’ workplace injuries. The following are common types of marketing risk. *Address all correspondence to: Court rulings have differed by state [21]. Several different forms and endorsements exist for listing the contractor as an additional insured on the subcontractor’s policy. Here the management of the risk is transferred to a third party. This is similar to experience rating except the actual rate paid is determined at the end of the policy period based on actual experienced losses during the year. Fight the impulse to think you can.. 6. Contours of an emerging market for cyber risk transfer Daniel M. Hofmann, ... Cyber Insurance as a Risk Mitigation Strategy. A general contractor should make sure all subcontractors have WC insurance since this may affect some of the contractor’s own defenses against claims by injured workers. No one market entry strategy works for all international markets. This report highlights key trends and examines strategies for transferring the risks associated with pension plans. In addition, MNEs can use capital structure to transfer risk to creditors or, if risks are contractible, MNEs can devise contracts to transfer a risk to third parties. A common practice is to contractually transfer the responsibility for loss to a third party such as a landlord, tenant, contractor or subcontractor. Risk transfer means getting another party to accept the risk, such as having a syndicate like Lloyd’s of London provide insurance for the venture. WinSun, a Chinese construction company, expects up to a 50% savings on housing construction using 3D printing [26]. Thus, the umbrella policy could cover losses in excess of the policy limits of any of builders risk insurance, workers’ compensation insurance or general liability policy. This can have significant consequences if losses are severe enough. Some risks that might be borne by one party can be transferred by mutual agreement to another party in the contract. Retention levels on the policy (the deductible) vary from $500,000 to several million dollars, although retention levels have been going down. If you export to 10 markets instead of one, you can shift your efforts to other markets when one goes through a downturn. Risk transfer is a common risk management technique where the potential of an adverse outcome faced by an individual or entity is shifted to a third party. Subcontractor default insurance can help the contractor hedge this risk. The 2013 CGL policy has a “contractual liability exclusion” that eliminates an assumption of such risk within the liability section of the CGL unless it is for a liability that the insured would have had even without having signed a hold harmless agreement, or unless it was for a liability assumed in a contract or agreement that is an “insured contract.” The meaning of this last term continues to be litigated, and it behooves the contractor to consult their broker for what parts (if any) of the hold harmless agreement can be covered by the CGL. It also assesses the effectiveness of these strategies over the past year highlighting areas where management feels that … The same risk management or insurance plan will not be applicable to all projects due to location differences, beginning state and ending state site differences, differing neighboring buildings and their vulnerability, differing owners, deliverables, and contracting agreements between the owner and contractor. Not all risks can be transferred, either through insurance or through contract. “It’s important when you are considering your price that you realize it is not for yourself, but for your target customers,” says Dolansky. To reiterate, risk transfer is passing on (“transferring”) risk to a third party. If the insurance is used to cover production and operation – for accepting such risks. First, the broad form transfers the most incurred risk (financial responsibility) from the contractor (indemnitee) to the subcontractor (indemnitor). When an individual or entity is purchasing insurance, they are shifting financial risks to the insurance company. Coverage extended by this endorsement was typically limited to the contractor’s vicarious liability for design errors and omissions inherited from a third party (e.g., an architect or structural engineer hired by the contractor), and not that of the contractor [11]. Alternative risk transfer is the use of techniques other than traditional insurance and reinsurance to provide risk-bearing entities with coverage or protection. Let’s see these four techniques in detail. The larger the project, the more subcontractors there are on the project, the more varied, complex, and potentially overlapping are the risk and potential losses. Builders risk insurance is typically project-by-project with coverage starting once the building materials are delivered to the worksite and stopping when work is complete and the finished project delivered. Strategic Marketing And Risk Transfer, LLC is a Missouri Limited-Liability Company filed on March 17, 2003. When construction is finished ahead of schedule the contractor is rewarded a pre-specified amount per day. The company's filing status is listed as Active and its File Number is LC0080194. This product is Contingent Business Interruption (CBI) Insurance. The field of alternative risk transfer grew out of a series of insurance capacity crises in the 1970s through 1990s that drove purchasers of traditional coverage to seek more robust ways to buy protection. and also liability insurance for accidents, injuries, and damage to other people or their belongings.. Risk Transfer Strategies, LLC is a New Jersey Domestic Limited-Liability Company filed on August 1, 2007. Importantly, the coverage trigger date is only applicable for start of the delay claim if the contractor can show that they would have completed on time if not for the direct physical damage or loss to insured property. Risk Transfer Strategies Risk transfer is one way of lowering a business owner’s exposure to loss using a variety of methods. There is an insurance policy that covers the risk of a supplier having damages that affect the contractor’s ability to perform on their own construction project. The Apocalypse. Risk transfer is a common risk management technique where the potential loss from an adverse outcome faced by an individual or entity is shifted to a third party. For example, you are lacking resources, skills, or you are busy with other activities, etc. 2 Comments. This is partially due to climate change, increasing catastrophic events, and the consequential regulatory changes likely to spur new and challenging building codes. The type or form of hold harmless/indemnification agreement determines the degree to which the liability associated with the indemnitee’s negligence is shifted to the indemnitor. There are many risks in construction necessitating decisions to avoid, retain or transfer an identified risk (The A-R-T of Risk Management) that ideally should be made in the planning phase before project start. A goal of risk management in construction is to minimize risk exposure and the total cost of risk for a project. Some of us plan for it. When accepting risk, the company or individual must make sure it is a potentially profitable decision. How prepared would the bank be, for example, if the loan portfolio were contracted or expanded? Cost plus pricing can reduce the potential for safety and risk management related losses but increases costs. Market Risk Management: Value. The strategy represents a risk because competitors are quickly improving their products. In spite of what the name may imply, self-insurance involves no transfer of risk. The benefit, of course, is that the profit from the insurance business is retained internally while still satisfying insurance requirements (such as the mandate to insure workers’ compensation risk). Insurance companies can accept risk from others because the statistical law of large numbers and central limit theorem allow them better estimate expected losses for a risk pool, and with greater precision, than could an individual insured. Many conclude that the hold harmless agreement is an “insured contract” and hence is excluded from this policy exclusion (and therefore is included in the CGL coverage). HeadquartersIntechOpen Limited5 Princes Gate Court,London, SW7 2QJ,UNITED KINGDOM. According to [1], the top five uninsurable risks faced by the construction company (and needing self-insurance and risk mitigation strategies to address) are reputational risk, regulatory risk, trade-secret-intellectual property risk, political risk, and pandemic risk. Quite simply, a catastrophic loss, if transferred to the insurance company, could bankrupt the insurer, a likelihood not desired by the insurer. Coverage under these policies is triggered by interruption to contractor due to supply chain or logistical failure [18]. The strategy to address market risk is tightly coordinated by US Treasury through the OCC (Office of the Comptroller of the Currency), which in turn has been working closely with the Bank of England and European Banking Authority. The safety and risk management of each worksite must be evaluated separately (and continuously) as environmental hazards or exposures can differ from site to site (e.g., one site may have flood risk, another fire risk, another vandalism and theft risk, etc.). Our clientele are corporate clients and institutional investors who require risk mitigation strategies along with a detailed hedging program. Of course, the likelihood and severity of a job injury differs significantly by employment duties, i.e., an office worker will have a much lower workers’ compensation insurance rate than a carpenter or a roofer working for the same contractor. A common rating plan used by large contractors is the “retrospective rating” plan. The market for excess and umbrella policies exists to provide the contractor with an option to raise the upper coverage amounts for all underlying policy exposures to have a consistent uniform higher limit on all. If a contractor or owner is going to insure several projects at the same time, they can obtain coverage on a blanket basis, which may reduce costs. Response Strategies to Negative Risks or Threats: Avoid, Transfer, Mitigate, Accept. The benefit of this formal self-insurance arrangement is that there is no administrative fee or profit loading charge, thus making the pre-funded bank account approach to self-insurance more economical for the company. If the contractor requires subcontractors to hold high limit umbrella policies, then the contractor may hold lower limits on its own policy. The most favorable risk transfer (for the contractor) is to have additional insured status with an endorsement that includes both work in progress and completed work (an ongoing operations endorsement and a completed operations endorsement). Property and casualty (P&C) insurers are companies that provide coverage on assets (e.g., house, car, etc.) The contract also identifies and allocates risk. Two formal techniques for planned self-insurance are prefunding a risk account to pay for claims internally as they arise, and forming an insurance company as a subsidiary of the construction company and then buying insurance from this insurer. Unlike insurance, written to cover unexpected fortuitous events that affect the project and that indemnifies the insured and provides legal defense of the insured under the policy, a surety bond is written to cover the contractor’s obligation to the owner under the contract and does not provide any legal defense for the contractor. Builders can contractually transfer risks to involved others or clients (e.g., through hold harmless agreements) or to insurance companies. It is insurance often written on an “all risk” basis, meaning it covers all risks except those specifically excluded by contract language. On the other hand, regular BI Insurance addresses the risk of losses arising at the contractor’s worksite that cause losses and interruptions to the contractor. A pure captive is an insurance company subsidiary that only insures the risks of the parent company. The professional liability insurance policy is usually written on a “claims-made” basis, meaning that claims are only covered if they are made during the policy period. If the experienced loss goes above that policy limit the contractor (or owner) is still liable for the risk consequences. For a detailed description of WC coverage, details on the history, current issues and controversies see [2]. Professional liability claims are not generally covered by a CGL insurance policy. Insurance is an example of this risk response strategy. Risk management strategies range from avoiding all risk whenever possible, to accepting most risks and doing everything possible to eliminate those risks. Since the damage did not occur to the construction project’s own physical site, losses associate with these supply chain disruptions will generally not be covered by the usual builders risk, general liability, or the contractor’s other policies. Coordination problems regarding safety and attitude toward risk-taking can occur. A hold harmless agreement is a contractual agreement between two parties that specifies how the risk of liability arising during construction will be distributed. A robotic arm controls a 3D-printer and this 3D printer produces an entire building (or component parts needed for construction). Including our core strength which is hedging Market Risk and Operational Risk. For example, an individual who purchases car insurance is acquiring financial protection against physical damage or bodily harm that can result from traffic incidents. The Global Patient Lateral Transfer Market report offers a deep analysis of the Patient Lateral Transfer trade. Strategies for Sharing Risk. Points to Consider: Competition ; Intense competition on a national and international level both in the U.S. and abroad. Risk Transfer – A Response Strategy for Limiting Damage from a Negative Event. The second intermediate type of hold harmless agreement has the subcontractor (indemnitor) assume responsibility for all loss costs except those arising solely from the contractor’s (indemnitee’s) negligence. Not all companies are large enough to take advantage of these techniques, however. Faulty wiring however, could cause a financial loss for the contractor, such as if a third party was injured and sued the contractor. Illustrative examples include having the owner as the indemnitee and the general contractor as the indemnitor, or it could be a contractor as the indemnitee and subcontractor as indemnitor. Pure risks are potentially amenable insurable but speculative risk are not. Insurers set premiums for the construction firm in accordance with the number of workers they have in each job classification [2, 4]. Risk Transfer Instruments. Since insurance products generally have a deductible or co-pay, and a limit of liability, the contractor always faces the assumption of some of the risk (that below the deductible and above the policy limits, for example), so they are “self-insuring” these losses. 3. As such, if the client receives a copyright claim, the contract writer would (1) be obliged to cover the costs related to defending against the copyright claim, and (2) be responsible for copyright claim damages if the client is found liable for copyright infringement. Risk created by a subcontractor or its employees can still come back to affect the contractor through the legal doctrine of respondeat superior and the existence of vicarious liability of the contractor (the liability of an employer or supervisor for liability generated by their employees). It describes situation when we transfer the risk to another person or entity such as insurance agency. The length of the indemnity period is the time needed to remedy the delay loss. The ideal characteristics of an insurable risk, as delineated by most risk management texts (e.g., [2]) are: There should be a number of independent similar exposure units as viewed from the perspective of the insurer. They transfer the risk by outsourcing the project with contractual penalties for project failures. These include: AI innovations providing enhanced visual processing using videos of worksites to help identify safety hazards, drones, high tech sensors and other enhanced visual processing to automate tracking of project progress against plans, as well as 3D models from data captured by drones to measure progress against original designs, and to detect any errors or inconsistencies [30]. One insurance policy covers the entire project instead of each of the multitude of subcontractors each with their own insurance policy covering just their piece. We share our knowledge and peer-reveiwed research papers with libraries, scientific and engineering societies, and also work with corporate R&D departments and government entities. Market Risk is generally defined as the risk of the mark to market value portfolio, instrument or investment increasing or decreasing as a result of volatility and unpredicted movement in market valuations. If the general contractor is the lead party with subcontractors as subscribers, the arrangement is a Contractor Controlled Insurance Program (CCIP). Fortunately, there are many resources available to help mitigate these risks. Blogging, Project Management. To keep learning and advancing your career, the additional CFI resources below will be useful: Learn to perform Strategic Analysis in CFI’s online Business Strategy Course! PRT Insurer Marketplace Remains Vibrant; Active Participants: AIG, Athene, CUNA Mutual, Great American, Legal & General, Mass Mutual, MetLife, Mutual of America, Mutual of Omaha, New York Life, One America, Pacific Life, Principal, Prudential, Securian and Western & Southern. It’s based on principles of collaboration, unobstructed discovery, and, most importantly, scientific progression. Defects discovered after job completion will not necessarily be covered by builders risk insurance, and another type of insurance is needed to cover these [4]. Thus, for example, if a contractor hires a subcontractor who causes physical damage, bodily injury or liability expense related to the construction project, only the subcontractor can file a claim on their insurance policy. Transfer. The transfer risk response strategy is used when you cannot manage the risk on your own. The contracting parties to the hold harmless contract agree among themselves, before any loss occurs, on how to split the costs of a risk realization. This is a comparative fault form, as determination must be made as to what percentage of the liability was the fault of the subcontractor and what was due to the contractor [20]. PBGC premiums) have provided both opportunities and barriers for the pension risk transfer market. Contracts can include an indemnificationIndemnificationIndemnification is a legal agreement by one party to hold another party blameless – not liable – for potential losses or damages. It is also desirable that the contractor have written into their contract with the subcontractor that they be listed as having primary (as opposed to excess) additional insured status on the subcontractor’s policy. If the premium is unaffordable to the insured, or if the cost of underwriting (selecting and pricing) the risk is too high for the insurer, then an insurance contract will not be created. When used in construction, surety bonds are called Contract Surety Bonds [8]. are companies that provide insurance to insurance firms. The best response is to transfer a portion or all of the risk to a third party by purchasing insurance, hedging, outsourcing, or entering into partnerships. This section is forward facing to identify some emerging risks that demand construction management attention before the risks are devastating. Login to your personal dashboard for more detailed statistics on your publications. The risk function can help optimize the asset and liability composition of the balance sheet by working with finance and strategy functions to consider various economic scenarios, regulation, and strategic choices. Another difference is that Coverage A covers damage from an occurrence resulting from negligence of the insured, which is unintentional. Until recently, few insurers have offered the product, but the market is expected to expand, and become more available to smaller contractors [14]. Three types of Contract Surety Bonds are most relevant in construction. For example, general contractors may require their subcontractors to provide surety bonds to protect the contractor. Many businesses keep a reserve of cash, often referred to as a transfer risk reserve, to deal with these issues. With this broad form agreement, the subcontractor agrees to take on all related liability for accidents whether it be due to their own negligence, negligence by the contractor, or a combination of negligence on the part of both. Diversify your export markets. It is a large factor in international business and currency trading alike. The maximum coverage level the contractor sets for their umbrella can be a complex choice made in collaboration with their insurance broker. Risk transfer strategies can help reduce both risk and expenses for DB sponsors. Contact our London head office or media team here. The second self-insurance alternative available is to form a subsidiary that is an insurance company, and then have that insurance company write the insurance for the parent company. While the perceived importance of ESG is high, the risk transfer market also believes its mandate, or business strategy, itself is aligned with ESG factors. 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