The feasibility of using alternative risk transfer and risk financing mechanisms is an option that should be explored by construction industry professionals that need to manage multiple risks and exposures. Particularly, if you are currently using other forms of risk financing techniques in order to finance the residual risk that cannot be contained through traditional risk transfer methods, such as the use of conventional insurance programs and/or products.

C-Risk can assist you to identify, quantify and control your risks by designing alternative risk management programs. These programs take into consideration that a company, to the maximum extent possible, should attempt to retain as much of its own losses as practical, thus avoiding the escalating costs associated with transferring these losses to an insurer.

Risk management techniques can include, transferring risks through safety engineering or loss control, using risk transfer and indemnification provisions in contracts, retaining risks which are within the company's financial capacity and insuring risks which are above the company's retention capacity, using hedging or derivative financial instruments, and sometimes insuring for traditionally insured hazard risks. These techniques and methods, together with financial risk contingencies, should all be evaluated in the design of a comprehensive risk management program.

Alternative risk financing methodologies can include, self-insurance, large deductibles, cash flow and experience programs, retrospective rating plans, a variety of fronting arrangements, and captives. Each of these alternatives has its own merits and should be stringently evaluated in order to determine their appropriateness within each company's business model.

Alternative risk financing mechanisms are being used more frequently by the more sophisticated construction financial professionals who have a relatively good grasp and understanding of economics, finance and statistics. These skills are required in order to be comfortable with using probabilistic risk analysis as a decision-making tool to effectively manage portfolios of risks.

A few pioneering accounting, consulting, financial services, insurance and reinsurance firms have been dabbling with the concept of "enterprise-wide" or "multi-line/multi-year" risk management programs. Call them what you want, but what they are is basically using a diversification strategy or "portfolio theory" to attempt to balance a company's operational risks.

The C-Risk approach to "holistic risk management" is based on a similar concept. Since most construction firms must balance a multitude of risks, e.g., contractual, financial, operational, organizational, etc. We advocate that a detailed risk assessment be performed in order to determine all of a company's risks. We have found this to be the optimal approach for developing a comprehensive risk profile. A company's risk profile can be used as a road-map to more effectively manage, control and mitigate risk.

With the increasing volatility in the financial markets, combined with hardening insurance costs and reductions in available insurance underwriting capacity, alternative risk transfer and risk financing mechanisms are becoming a more viable option for an increasing number of CFOs and Risk Managers. Determining what alternative risk transfer options will provide the optimal program structure is the main goal of most construction financial professionals. The use of risk analysis tools and risk financing feasibility studies can produce beneficial results towards achieving this goal.

One risk analysis and risk management system that has proven to be highly proficient in assisting with the decision-making process is Quaestor Risk Management Systems (QuaestorRMS). The QuaestorRMS Risk Review Analysis system operates over a variety of financial platforms, which can be employed and used as management tools to aid in making informed risk management and loss control decisions.

QuaestorRMS provides the statistical analysis to assist in the decision-making process of what risk should be assumed by the client. When QuaestorRMS is used, the Risk Review Analysis provides the basis for determining an appropriate insurance and/or risk financing program design, can increase underwriting support, and become an analytical tool for management to periodically track risk related expenses and exposures.

In the future, contractors will need to have their portfolios segregated into risk coverages and accumulated asset segments, where they will be able to endorse these portfolios as their risk profile changes, e.g., changes in construction project segmentation to cover design-build projects, environmental projects, wrap-ups (OCIPs and CCIPs), etc. This type of functionality will require new risk transfer and risk financing mechanisms. Implementing these new types of portfolio methodologies will allow contractors to get what they need, without having to pay the additional overhead costs presently factored into rate structures for having four or five policies in place with different insurers, each with separate fees and assessments.

For additional information about C-Risk and how we can assist you with your risk management program, please contact us at 503-228-0884 or email: consulting@c-risk.com.