Controlling and Minimizing Risks with the Use of Risk Assessment
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Risk assessment can be used in almost every industrial setup in the world.
Case Study 1
Problem Statement: An insurance agent needs to conduct risk assessment on a wind mill farm in Texas to check its feasibility as a prospective candidate for insurance. The objective here is to understand the most relevant category of risks that are of the highest concern while financing such an industrial insurance project. The risk assessment methodology here involves analyzing the various threats that can arise due to various technological, engineering, contractual and performance issues.
The wind mill, in question, will have 64 turbines, each of which will have the capacity of 1500W; thus, providing an overall output of around 100MW, with an energy conversion ratio of 26%. The project comes with a strong backing of the state government, as the wind farm will provide clean energy to the nearby cities.
The insurance cover demanded by the client requires the insurance firm to fully refund the original expenditure in the case of any lasting damage, productivity loss and technological short coming. Having such a client will bolster the economics of the insurance firm, but the question remains whether such strong insurance terms would one day work against the company. This case study will cover all the intricacies covered by an insurance agent before choosing his clients.
Solution: The risk assessment analysis of such a high profile client is started from the day the first draft of the wind mill farm is produced. The charm of having such clients is the fact that they work as a constant source of income and the contract value decreases with each year unless newer ones are made. The critical resources of such projects vary as the project matures. As in the project development phase, the critical resources are the funding source, government clearances and construction workers, among others. Various techniques and simulation tools are used for this risk assessment process.
Financial risk management (FRM) instruments are used to assess the risks that will affect the construction and operating phase of the wind project. These instruments will be studied based on mathematical simulations carried out on the computers. Various technical surveys, like wind speed measurements, soil density and work force availability, are also required to make sure that the wind mill will actually be productive after its completion.
Risk assessment is also done on the testing phase of the project. It can very well happen that the project does not pass the approval required by various standardizing companies. This way, both the project and the insurance company will incur losses.
Based on the above analysis, a risk analysis chart is created, which looks like this:
| Risk | Risk Detail | Project Stage |
| Planning Delays | Delay caused by lack of permit or workforce | Project Development Stage |
| Engineering Risks | Physical damage caused by engineering faults | Construction Stage |
| Physical Risks | Caused by manhandling of appliances | Testing and Operating Stage |
| Natural Hazards | Damage can be caused by heavy rains or tornados | Operating Stage |
The above table shows only a few of the possible risks.
Results: Insurance is widely considered to be a business of risk. It involves identifying and understanding the various aspects of risks involved with insuring any particular client. In this case study, the stake holders of the wind mill farm could very well be planning to con the insurance company.
The decision to provide the financial cover is based on the data collected from the risk assessment chart. Using it, the expected loss from the project is calculated through the formula:
- Expected Loss = Financial Loss * Probability of Loss
If the value is within the budget of the insurance firm, the project is insured.
