Page 275 - Sustainable On-Site CHP Systems Design, Construction, and Operations

248 C o ns truction

occur based on past experience. While self-insurance does not have the underwriter’s
advantage of true risk spreading, the financially strong firm can take a long-term view of
frequency exposures and make allowances for them as a routine cost of doing business.
Transferring risks such as automobile or construction equipment physical damage or
small component breakdowns is typically not cost-effective. Assuming the risk of loss for
a low frequency, high severity event such as an earthquake or flood is not recommended.
Risk retention can take on several aspects. It can be as simple as establishing a reserve
account for worker’s compensation claims to as complex as reinsuring ones own captive
insurance company with a separate finite risk contract. Accordingly, the retained por-
tion of ones risk portfolio should at least have built-in protection for shock and/or batch
losses.
Through careful analysis, peer studies, and some intelligent guesswork, insureds,
brokers, and underwriters seek to apply the so-called law of large numbers and then
determine a reasonable premium for transferring the risk in view of its own profit
margins and the general competitive marketplace.
Insurers generally tend to spread their risk exposures over their numerous already
insureds and where prudent attempt to protect themselves by transferring a portion of
their risk to outsourced reinsurers. Insurers’ interest in classes of risk such as CHP plant
projects can vary with the short-term profitability of that class. A bad year combined
with a less than impressive investment portfolio can often be enough to dramatically
push a market out of a particular class.
Look for opportunities to renegotiate a policy should an insurer decide to buy
market share on a short-term basis with below average pricing. An insurance company
can also, on short notice, reverse itself and decide to drop out of the market because it
failed to understand the risk on a subsequent or prior policy, failed to appreciate the
exposure, and failed to accept the very long-term implications of CHP operational risks
in periods of business downturns.
For most CHP plants, a combined risk retention–risk transfer strategy may be most
cost-effective. Whatever the circumstances, one should seek to structure a program that is
stable, cost-effective, and responsive to CHP plant operational issues and profitability.
In general, the risks associated with a private sector CHP project, falls into either a
project- or non-project-related risks. Examples of non-project-related risks include
adverse interest rates, unanticipated inflation adversely affecting financing, material,
equipment or labor costs, changes to current codes, or adoption of costly regulations.
Unfortunately the latter risks are not insurable using traditional insurer methods.
Project risks, however, are those directly related to the contemplated CHP project
and can include, for example, loss to another CHP plant developer, unrealistic pricing
of long-term utility power, failure to meet permit requirements, or business downturns
affecting electricity demand.
Fortuitous risks, or those risks that happen by chance or accident are insurable subject
to underwriting terms and conditions that ensure spread of risk and the elimination of
moral hazard concerns. They include injuries to employees or third parties; delays in
completing construction as agreed; physical losses or damage with the resultant loss of
income or profits; related consequences of professional negligence; interruption to CHP
plant operations; and major CHP plant equipment breakdowns.
Unfortunately there are no standard insurance and risk management programs for
the on-site CHP plant industry. Understandably, a number of parties also have an interest
in the risk management and insurance programs associated with a CHP plant project.