Contractors' risk and insurance in the Australian building industry

The problem under investigation is to test the hypothesis that the building industry in Australia can benefit from a more detailed analysis of the present application of contractor's risk and insurance. A review is given of the literature relevant to the subject. The analysis set out in the thesis commences with an examination of the importance of the contractors' risk class of insurance in the insurance industry and the problems faced by the building industry in regard to relatively high commissions and management changes, relatively low outstanding claims and the inadequate knowledge of underwriting security in the event of catastrophic losses. Examination of insurance industry practice with contractors' risk general insurance contracts highlights further problems in terms of inadequate existing insurance provisions and the insurance of subcontractors, where recent attempts by the building industry to secure reform have proved unsuccessful. Analysis of building industry practice with contractors' risk insurance in Australia shows the problems of traditional methods of securing adequate project insurance. The need for project insurance specifications that are competitively tendered is highlighted by way of example. Risk identification programmes are devised for streamlining existing procedures with due consideration of the constraints in obtaining change within the building industry. Examples of building risk are listed as a first step towards a more detailed classification by the building industry of all applicable risks that are capable of being identified while, in the Appendices, a proposed thesaurus of standard terminology is listed for further development. An approach to quantify the range of risks and probabilities of events is introduced with the risk probability model that, by way of illustration, is used to assess a fire and explosion risk premium for a project. The risks to principal parties under contract, being owners, builders and insurers, are represented using Venn diagrams. In order to secure a change in present procedures, better communication aids are required as a prerequisite to the development of mathematical models and risk databanks for more accurate analysis and assessment of risk and insurance premiums. A maximum risk model is used as a method of corporate planning, using the Venn diagram notations, to identify any contract party that may have a financial inability to absorb its maximum risk liabilities under a project contract. A third mathematical model is introduced for the assessment of contract conflict costs which provides scope for a possible new insurance field. In the example given, subjective costs and probabilities are used. However, a method is stated of obtaining actual costs, probabilities and the ranking of risk for the contract conflict model. It is concluded that the hypothesis was proved, and that contractors' risks and insurance can be better assessed by a more scientific approach. Directions for further research include the establishment of an industry thesaurus of standard terminology, further diagrammatic relationships and mathematical models, and the establishment of industry databanks of risk and insurance information that will allow more accurate risk forecasting, rating and better loss minimisation schemes.