Page 274 - Sustainable On-Site CHP Systems Design, Construction, and Operations

Managing Risks during CHP Plant Construction 247

The insurance risk and insurance manager takes a much different approach to risk.
The managers look to the “circle of risk management” as a reference for dealing with
the risks and exposures of the overall business enterprise. The “circle” metaphor was
adopted because there is neither an end nor a beginning to the management of risk.
As long as there are internal and/or external uncertainties, there will be the need to
continually “go around” the risk management circle.
Next, one must understand the components of the circle in terms of examples of
how these concepts are or should be applied. One must begin with the identification of
all risks, not just the insurable risks. If the organization is interested in quantifying its
total risk quotient, this identification process must go beyond the traditional areas of
property, boiler, and liability. Survey, research, benchmarking, and creative thinking are
just some of the methods used to identify risk. The key to determining maximum fore-
seeable and probable maximum losses is not to allow owner-operators or developers to
“ball park” potential estimate for loss coverage needs.
After inventorying and quantifying the risks, underwriting and claims manage-
ment needs to determine which exposures should be totally avoided. While often the
least expensive of the steps, there could be significant missed opportunity costs associ-
ated with an avoidance strategy.
CHP plant developers are sometimes considered to be risk takers among many
insurance carriers. Most responsible insurance executives are more likely to seek ways
to maximize their return while still taking some risk. Yet insurance executives do not
treat it as a “zero-sum” game, the conservative insurance risk management professional
places greater emphasis on the minimization of risk. From their client’s perspective,
safety and loss control are considered expense items and relegated to client’s nonopera-
tional professionals who may not have the influence, control, or impact that they should
on maintaining safe operating practices when faced with tight deadlines and growing
project cost overruns.
Today’s insurance loss control and safety specialists are required to minimize the
occurrences of loss by considering both pre- as well as post-event loss scenarios. Loss
control specialists also try to develop systems, procedures, and processes that reduce
the frequency or occurrence of all foreseeable loss situations. Having sufficient fire pro-
tection, adequate spare parts, and an effective crisis management program are examples
of what should be key components of an integrated risk management program for
every CHP plant.
Often the easiest and least expensive way to deal with risk is to transfer it contractu-
ally by employing the power of the contract with owner or their subcontractors who
may have been required to share to some degree the assumption of some risk. One’s
financial backers also do not want to assume any risk and seek to transfer it all to their
borrowers. As long as there is a balance between the risks that are assumed via a con-
tract and the risks transferred via insurance and clearly retained, the entity can forecast
its cost of risk. When one side permits risk leakage or an imbalance to occur, an unman-
aged exposure exists that could jeopardize the profitability, or even viability of any of the
owners, contractors, architects, and engineers own firms.
Risk financing must also be addressed on the insurer’s so-called wheel. Risk financing
includes two basic components, namely, risk retention and risk transfer (via insurance).
The risk retention option, whether it is by self insurance (or self funding,) seeks to
duplicate what a hypothetical insurance underwriter would undertake in a more sophis-
ticated manner thereby avoiding the fictional costs associated with an insurance policy.
Self-insurance is one way to buffer the risk for those presently unknown events likely to