The words are often used in lieu of the other, because both are promises that manufacturers or sellers make to customers. Each is a promise, but, offers different legal rights. A guarantee has no actual ‘legal’ transport, whereas a warranty does. Guarantee, are commitments, and Warranty is the assurance made to buyers by the producers. In the case of a product guarantee is a promise that it will work as they claim it will. A warranty is a promise (or guarantee) that they will fix it if it breaks within a certain period of time. A warranty is usually a written guarantee for a product that makes the producer responsible for repairing or replace a defective product or its parts.
A warranty is in its simplest form a simple contract. Some warranties run with the product, so that a consumer who is distanced (by wholesaler, distributors, dealers) from the manufacturer also gets it. A warranty may be express or implied. Express warranty is explicitly provided (written) with indication of the jurisdiction. Implied warranties are unwritten promises that arise from the nature of the transaction, and the inherent understanding by the buyer. Here the goods are expected to be merchantable that is to confirm to ordinary expectations of the buyer. Limited warranties are time limited, whereas performance warranties have set parameters (like kilometres). Warranties often exclude abusive usage, malicious destruction, acts of God or nature, and parts or other inputs that wear out (rubber plastic goods) and replenishment (tires, lubrication, fuel, coolants). Warranties are often limited to the first consumer (buyer) and original location of delivery.
Warranties and Guarantees are mechanisms of assurance. When one procures a consumer item, some degree of assurance in expressed and implied form is automatically available. Entities that are formed of several components are assured by the assembler. Complex structures like buildings, however, come-up through works of several assemblers, and lack comprehensive assurance.
Comprehensive or Compounded Assurance : Concepts turn into Designs + Specifications + Contracts, and ultimately into a deliverable entity. If the deliverable entity is deficient, than everyone concerned for its conception, design and production, is held responsible. But in reality this is very difficult, as there are many persons, agencies, materials, technologies etc. involved in the process, with very indistinct and overlapping roles. Often, the extent of individual responsibilities and mode for verification of their compliance, are not properly defined. In some instances’ delivery occurs as compounding of many entities, where the individual share of responsibilities need not match with the physical scale of contribution. Compounded entities do not automatically offer a comprehensive assurance. Here all individual assurances must be assimilated into a comprehensive assurance which then must be transmitted to the owner or operator of the project.
Creating – Providing own Guarantees : Dynamic Users employ raw materials (materials, parts, components) in forms and conditions beyond the original manufacturers’ provisions. Guarantees provided by the original manufacturer for the few definite end-uses are rarely of any help for dynamic users. Even where materials are employed in the manner prescribed by the original manufacturer, the output process could make it impossible to relate a particular inadequacy to a certain material or procedure. People who assemble complex entities cannot hope to dilute their responsibilities even by involving people like suppliers of materials, etc., System creators must evolve their own guarantees.
Comprehensive Guarantees: In some jobs several vendors come together to a site, and create a System. Designers are not equipped to check or test run the system, or in such instances the system is not completely verifiable. Often there is no Master Agency to assure that the system so assembled will function according to the parameters set by Designers.
Owners (of buildings, structures and systems like ships, aircraft) however, need a comprehensive guarantee to assign the operations and maintenance to agencies concerned with working of the whole entity, such as Insurance companies, Safety (fire, security) Engineers, System Operators, etc.
Processes required for Comprehensive Guarantee to materialize: Specifications for Turn-key Jobs invariably include ways and means for assimilating and interpolating individual guarantees into a composite form for the individual part buyers or users. Specifications are also provided for appointment of third party agencies to manage the guarantees and warranties for the life cycle of the entity. Such additional mechanisms provide an uninterrupted cover for all the resultant liabilities and an operandi for the management of risks thereof.
Lloyds Register of shipping: Lloyds is one such organization that began in 1760 in London, It provides standards for construction and maintenance of merchant ships, and provides necessary technical help. Shipping agents, governments, bankers, insurance cos all depend on the certification provided by Lloyds.
Contingent liabilitiesare commitments that may give rise to a cost as a result of a future event. They often result from indemnities, guarantees, warranties and certain liability caps in contracts. Contingent liabilities are generally used to allocate risk between parties to an arrangement. The Commonwealth’s policy is that risk should be managed by the party best placed to manage it.
A liability account that reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period. The liability amount is recorded at the time of the sale. (It is also the time when the expense is reported.) The liability will be reduced by the actual expenditures to repair or replace the product. Warranty Payable or Warranty Liability is considered to be a contingent liability that is both probable and capable of being estimated.
25 GUARANTEES and WARRANTIES –part of the lecture series DESIGN IMPLEMENTATION PROCESSES
In any venture risks of under-performance, non-performance exists. These are due to mis-match with the expectations, circumstances and inadequate foresight and care during planning, execution and operations of projects.
Theliabilities in ventures manifest, at many different levels:
● Designers’ Liabilities: Project conceiver, planner or designer, are all liable for the inadequacies of conception resulting in poor definition of performance requirements, for having inadequate processes of verification for the offerings of the contractor or vendor and for establishment of operations mechanisms that is ineffective and lacks coordination. Designer’s take-on liabilities of sub-consultants, by agreeing to work with under-qualified experts.
● Contractor or Vendor’s Liabilities: Contractors’ or Vendors’ liabilities are more defined and so always restricted, in spite of all-inclusive clauses that may have been integrated in the terms of contract. The liabilities of the contractor generally relate to correcting the defects or complete replacement. The liabilities may also include making good the loss of profit and loss of opportunity during the period of inadequate working. In some conditions it may include the cost of misuse of materials, site facilities and loss of life and damage to other properties.
● Operations’ Liabilities:Liabilities arise from the operations of the project or system. Designers and Contractors usually preempt such situations with appropriate provisions in the contractual relationship with the client. Operations specifications, in recognition of such situations provide for setting up of appropriate Risk Management Systems. A risk management system recognizes the role of regular maintenance. Guarantees and warranties help in diluting the level of apparent risks and thereby reduce the Cost of Risk-Management (insurance premium).
● Circumstantial Liabilities are mainly from external conditions like, disasters, calamities, political situations, changes in law, rules, perceptions, trends, fashions, etc. Some of these are natural and involve designers for inadequate perception and provisions. But other external liabilities depend on political, economic and social changes, and so many not attach a designer.
Liabilities for designers arise from what they professionally deliver. These include specifications, observations and supervision of a job. The specifications include 1 Drawings, Graphical representations, 2 Literary or oral explanations, 3 Models, samples, surrogate representations 4 Formal or tacit acceptance of happenings related to design.
Quality of Expression in Specification Writing: Writing Specifications is the most important way of facilitating a product or service. Specifications writing is an extended activity of contracting, so here too all the contract fundamentals are strictly followed. As per the natural law ‘a contract has to be enforceable, and whatever is specified must be doable. Specifications cover all valid and essential requirements of the job. A major danger in writing specifications is to include unnecessary information. So choosing, what to exclude is as important, as choosing what to include. Specifiers (Designers) must eliminate any requirement that adds no value to the Product or Service being acquired. The Specifier (Designer) must state clear conditions in a complete language, and yet remain brief.
Defects in Specifications and Liabilities: Very few specifications are totally free from defects. As a fundamental principle of law, a specifier (Designer) is responsible for the consequences of the specifications. Designers usually put in a disclaimer (in the contract with their client) for errors found in their work. The Insurance companies that cover the designers for Professional Liability (Professional Indemnity Insurance) insist upon it.
Most of the specification writers (Designers) incorrectly presume that their text of specifications is read and interpreted by comrade technocrats only, with whom they share similar experience and mind-set. During a dispute specifications are, however, more attended by non technocrats like the administrators, lawyers, jurors and judges.A contractor interprets the specifications, as long as the interpretation is commercially reasonable (an earning proposition).
The Notion of Deconstructionism: A French philosopher, Jacques Derrida originated the Notions of Deconstructionism. It is a whim of finding alternate interpretations of text. He contended that the meaning of a text is dependent on the context in which it is interpreted. All writings in some degree can be interpreted differently from what was intended. Deconstructionism doctrines, from Jacques Derrida and his colleague Michel Foucault, were a rage in many universities during the 1980’s. A quotation from Thoreau, ‘The mass of men lead lives of quiet desperation’ was attacked by a feminist deconstructionist in words like: ‘….. real intention was to say that most women lead lives of noisy elation.’ Here the writer’s unintentional gender-specific wording was interpreted differently.
Faulty Specifications and a Contractor’s Attitude: A contractor works with sheer sense of profit, and so deals with faulty specifications in any one of these ways:
1 A contractor charges by doing the prescribed work according to the personal interpretation.
2 demand extra for undoing what was done
3 charge for redoing the job according to the corrected interpretation.
1 a Contractor may refuse to execute the work causing delay, or
2 take a legal recourse on the grounds of impossibility of performance or commercial impracticability.
Specifications and Enforcement: A neat contract is one where things are delivered for consideration, but strictly in a one-way transaction. However, contracts are very complex. Certain jobs require clients to provide information, materials, equipments, facilities or services to the contractor (as per the terms of a contract or job specifications), and an obligation is incurred. Even if such things are offered with or without a return consideration, the contracting parties get tied up in the Reverse Transaction. A client, failing to deliver as promised, takes the blame for missed schedules and cost overruns. Specifications causing such Reverse Transactions are prone to enforcement difficulties.
Accuracy and completeness of Contract Specifications: A Contract is in force the moment it is signed, or dated to be effective. Once a contract comes into force, any thing has been left-out, or not properly defined, can be only corrected through a Negotiated Supplementary Agreement. A Contract and Specifications must not leave out any aspect, as something to be agreed or determined later on (e.g. a clause like: plastic paint of x quality, but colour shade to be approved later).
In design offices specification-writing is a last moment compilation, and as a result it is common to see specifications of items that do not exist, or have been eliminated from the project. Specifications of only intended items and required quantities of work should be provided to the contractor. Otherwise, the bids will reflect the necessity of being prepared to handle Intended items and Quantified work.
Holistic Products and Site Assembled Systems: Job assignments for Structures, Architecture, Interior Design, etc. consist of both, Holistic Products and Site Assembled Systems. It is often easier to handle Holistic Products, fully or substantially through Performance Specifications. However, Site Assembled Systems inevitably have some form of Design Specifications.
Specifications and Fair Trade Practices: Avoid specifying a particular product, agency, tool, equipment, or a patent process. Favouring one, to the exclusion of others would mean Unfair Trade Practice. It is a good business sense to encourage competition to achieve better prices and quality. Competition also provides optional and reliable sources of supply. Mentioning a particular product, provides an unintentional warranty of its suitability for the purpose. It is better to confine Specifications to Requirement Statements.
Property Disposal: When Writing Statements of Work, the Contractor must be told How to dispose of residual materials, garbage, sewage, emissions, etc. Such Disposal Procedures have to follow the local regulations, often at cost. The liabilities arising out of compliance and the cost operations need to be specified. If the residual materials are to be handed back to the client, then handling and storage must be specified. If disposal of such items is likely generate an income, who takes the money must be mentioned. The Tax liabilities of expenditure, income generated, or sales done for disposal, also requires clarification.
Valid Claims: A Designer and Client realize shortcomings of the work being executed, and request alterations or corrections. Such changes are not executed unless formally requested. The cost of such constructive changes is to be paid by the client and is considered a Valid Claim. Contractors also make mistakes. A contract specifies modalities for notifying mistakes and what is considered to be improper communication of information or reportage by the contractor. Contracts also list modalities for corrective action and settlement of costs.
Language: Contract languagemust be simple and for that reason sentences should be short. Long sentences do not provide any sensible meaning. Throughout the document for the sake consistency and even at the cost of creating dull and a simplistic write-up, use the same words, phrases (rather than exploiting a thesaurus). Use category numbering system and avoid inter-document referencing such as ‘see xxx page, ref to yyy sub item, see above-below’, etc. Avoid acronyms, If must, use the commercially known abbreviations, and provide a reference index with expanded meanings. Avoid ambiguous words, or phrases that reflect more than one meaning. Refrain from phrase constructions that due to their sequence of placement, context or grammatical relationship could be interpreted differently. Conflicting Requirements often result from using totality words (such as: all, always, never, every, and, none, etc.) in statements, when something else in another sentence makes an exception to the totality.
Writing in Passive Voiceis always superior. The object of an action gets precedence and thereby the required special attention. In specifications the emphasis must rest on the product being described. It also removes the mention of the actor. Government servants favour passive voice because it does not require the mention of the actor, and thus avoid the responsibility. Avoid using gender nominating words like he, she, his, her, him, man, men, woman, women, etc.
Grammatical Errors:There are three levels of grammatical errors. At primary level such errors do not affect the meaning being conveyed. (X ate less apples than Y vs. X ate fewer apples then Y). At next level the grammatical mistake renders the sentence totally meaningless. Such errors can be corrected through meticulous proofreading. But the most dangerous grammatical blunders are those that alter the intended meaning of the expression, to something different. These get passed over by most literary proofreaders and software like word processors’ grammar checks. Such mistakes can only be checked by an expert Specification Writer, or a Seasoned Contractor. The last levels of errors are most exploited by a lawyer in case of a dispute.
11 LIABILITIES –part of the lecture series DESIGN IMPLEMENTATION PROCESSES
Risks and Human Endeavours: A great deal is expected from human endeavours set up with expense of resources, effort and time, be it entities, events or organizations. Human endeavours, when fail to take off, perform adequately, or satisfy its stack-holders, pose risk.
Endeavours fail on two counts : Human endeavours do not work for the conceived functions or the original functions do not remain relevant.
● For the first case, the fault may be that it was not adequately conceived or the functions were not properly defined.
● In the second case, between the planning and operations phase the circumstances change and it is not feasible to recast the programme.
Anthropogenic hazards are those hazards caused directly or indirectly by human action or inaction.
What is a Risk? Risk is any set of such conditions that adversely affect a human endeavour. One can avoid, manage or accommodate, risks to a limited extent, but beyond these, the effects of risks have to be compensated, replaced or transformed in such a way, that there is a sense of equilibrium. One may not be able to reestablish the lost entity, reenact the missed event or resurrect the dead organization, but one may, indemnify against such losses.
Defining Risks : ‘Risk is any factor that affects an activity or object, denoting a likely negative impact from some present process or future event’. Contrary to this some believe risks often have an advantage, like a lottery that may provide unusually large gain for a very small loss. Risk if negative is valued against the scale of loss and frequency of occurrence.
Types of Risks-I : Purchasing a lottery ticket is a risky investment with a high chance of no return and a small chance of a very high return. But since the amount lost is small and the gain very large, lots of people go for it. In contrast investing money in a company involves a large investment, so we take care to find out the identity of the company. A government bond though provides a small interest is considered less risky. In finance the greater the risk, higher is the potential return.
Types of Risks-II : Risks in personal health are reduced by preventive actions, like avoiding illness causing situations. Secondary prevention can come by early diagnosis and perhaps preventive regimen and treatment. Third level of action is directed in terminating negative effects of an already established disease by restoring function and reducing disease-related complications.
Categories of Risks
● Natural Risks: These originate from outside the system due to the context or changes in the environment. This could be perceived as an advantage in a system which can be isolated with a barrier. Some interactive systems must flourish with the environment have to ‘manage’ the environment.
● Circumstantial failures: These are accidental, i.e. unpredictable in scale (size) and time of occurrence. The circumstances, within which an endeavour takes place is continuously variable and unpredictable, so is perceived as a natural failure.
● Intentional Risks: These are due to avoidable or malicious acts. Avoidable acts include adventurism, neglect, destructive tendencies etc.
● Man-made failures: These occur due to faults in conception, observance or operations of the system. These can be set right by foresight, flexibility of approach (such as adopting ‘open system or open-ended architecture’), provisions of additional capacities, and by including escape or safety procedures.
Man-Made Failures occur, because:
1. System is not designed or adequately equipped (technically) to serve the nominally expected functions.
2.System is required to serve functions for which it is not designedand there no processes to regulate the overuse, misuse or under or non-use.
3. System has a rigid design, structure or setup regimen which prevents corrections or improvisations.
4. System is so liberal (loosely or irregularly structured) that a coordinated emergency action plan cannot be enforced.
What is a Risk Management System? When endeavours fail to perform then a fresh effort is required. Risk management deals with such eventualities. It determines the chances of an occurrence, de-intensify the affectations, and create means to mitigate the losses.
Types of Risks
● Determinable Risks are predictable and suitable risk avoidance measures can take care of it. Certain factors trigger such risks, so observance and reportage mechanisms for such conditions can help avoid it.
● Indeterminable Risks have very low probability, or the twin aspects such as scale of affectation and pattern of occurrence are indeterminable. The damage and suffering cannot be predicted. Its mitigation is left to the concerned age and society.
● Probable Risks are predictable but within limits of probability. Here the trigger factors are not easily definable. Historical experiences show us what could be the scale of affectation and pattern of occurrence. Affectation can be spatially isolated and temporally limited, by design of the joints, connections, and by spacing and distancing. The occurrence schedules may be matched with a timed action, or even planned dormancy. Additional capacities (factor of safety, safe margins), are provided for such contingencies.
RISK Management Standard ISO 31000
Risk management processes are applied to project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, and public health and safety. Risk Management has been recognized as a generic standard under series ISO 31000.
ISO 31000:2009 -Principles and Guidelines on Implementation
Managing the Risks : One can avoid, manage or accommodate risks to a limited extent. Beyond these, the effects of risks have to be compensated, replaced or transformed in such a way, that there is a sense of equilibrium. One may not be able ‘to reestablish the lost entity, reenact the missed event, or resurrect the dead system’, but one may indemnify against such losses.
Dorfman 1997 prescribes four way strategies for managing the risks:
Transfer (buy insurance, hedge).
Ideal use of these strategies may not be possible as some of them may involve trade offs that are not acceptable to the organization or person making the risk management decisions. Another source (US Department of Defense) calls this ACAT, for
Risk Avoidance is just one important aspect of risk management. It means ‘controlling all detrimental activities’. But all risks cannot be avoided and thereby managed. Some risks are delayed, hastened, diverted, or even embraced. Avoiding risks also means losing out a very high gain potential situation. Many take a ‘calculated plunge’ for a small or rare risk.
Risks in Business: In business taking on a client (a new project) does not always translate into extra income. Because a new project may entail dealing with an unusual or odd client or requiring additional resources and it may mean less or no profit for the organization. Similarly taking on a prestigious assignment is a challenge, but the outlay on handling could be far more in comparison to a nominal project. Another example would be procuring a non standard product or system (without a full guarantee and warrantees) for an acute need, could mean greater cost of corrective measures.
Ways of managing Risks
● Risk Reduction, involves strategies to reduce the severity of the loss. In buildings this include fire escapes, controlled use of combustible materials, installation of sprinklers with fire detectors, etc. The cost of such risk reduction systems are checked in terms of what it can save or prevent.
● Risk Retention, means the person or the party bears the loss resulting out of an event. This is a viable strategy for small risks where the cost of insuring and getting compensation would be greater, like in minor illness or injuries. All risks that are not avoided or transferred are presumed to be bourn or retained by the person or party.
● Risk Transfer to another party by contract or by hedging (as in betting). Insurance is one type of risk transfer that uses contracts. Risks are transferred to another party, schedule to other time, shifted to different / separate location. The pace of transfer is often hastened or slowed, and the affectations are concentrated or spread. Risk of injury due to local impact (and so intensive) are spread to a wider area by means such as a helmet, a car air-bag, knee pad, a seat belt, etc. Impact buffers and such stopper mechanisms absorb the impact or divert it.
Risk Synergy Systems exist in some biological systems, pliant compositions and pseudo intelligent entities (e.g. some equipment with fuzzy logic and neural networking). These have capacity to self regulate or organize to accommodate the conditions of change. Such systems are inherently restricted or finite in capacity. Their risk sensing and accommodative functionality are available so long as required energy and other inputs are available. Designers strive to emulate such systems by integrating the risk handling features (such as: gas and fire detectors, auto sprinklers, auto open-shut opening systems, burglar alarms, earth quake and heavy wind load absorbers, etc.), into their creations.
Strategies for Handling Risks
Prioritization in Risk Management : A process of prioritization has many facets. Saving lives is given a higher priority then salvaging goods and equipments. Evacuation of human beings has greatest priority then saving a structure. But many countries feel sacrificing a human life may be unavoidable then surrender to a terrorist hostage situation. Risks with greater probability, higher monetary loss (of replacement), are handled first.
Cost aspects of Risks : Risk management include equating the cost of controlling the risk versus the cost of compensating the losses. It also includes the evaluating the cost of recovery against the expense for compensation. Justifying the cost of being prepared over a long duration for an event that has low probability.
Economics of Risk : Risks result into losses, delays, setbacks and deaths (humans, flora-fauna and diffusion or termination of the systems). Ideally, the expenditure on risk management must be minimized, while maximizing the risk-safe zones and periods (MTF =meantime between failures). Yet, sometimes risks are indulged into, or ignored in view of the benefits (often called a gamble or calculated risks).
Commercial Risks : In the commercial world risks are of two types: Inherent risks are part of any business operation, and affect the profits or opportunities negatively. Incidental risks are natural, and not always part of, or due to the business activity.
Intrinsic and Extrinsic Risks in Projects : Projects are work entities to accomplish certain goals, with a set start, process of run or operation and end or termination of the endeavour. Any condition that does not allow these objectives being achieved, is a risk. The risk could be intrinsic or extrinsic. The intrinsic risks could be handled through good design, management, and modalities of accommodation. The origins of extrinsic risks, are beyond the organization, so their nature, schedule, frequency of occurrence and scale of affectation must be identified.
Risks in Projects: Risks in projects are identified by enacting various scenarios (combination of various possibilities occurring together). The scenario, if risky is further probed to assess its potential severity and extent of loss. These two quantities are simple to measure, and then set as the value of the damaged component. The probability of occurrence, however, is difficult or impossible to assess as an event, mainly due to lack of its history.
History of Risk or Rate of Occurrence : The fundamental difficulty in risk assessment is determining the rate of occurrence, since in many instances the statistical information is unavailable. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for immaterial assets (with emotional value). Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of consideration.
Cumulative effect of Risk Measures : Provisions for various risks tend to have a cumulative effect. For example a building foundation is designed to carry the load of the building, with additional provisions for an earth quake, hurricanes, temporary loadings, etc., but not all of these are likely to occur simultaneously. Similarly we provide extra for individual considerations: loads calculations, strength of cement concrete and steel bars. These, if not properly attuned, these can add up to substantial over spending. All provisions for risks need a careful working for the individual, as well as cumulative effect.
Design Projects and Risks: Design Projects fail to satisfy a client, or are commercial losers for a variety of reasons like, shift in taste, changes in market demands, arrival of new technologies, prices, etc. Many of these factors begin to be affective when projects’ execution is long drawn or delayed. Finishing of projects on schedule, eases many such problems. Projects become risky due to poor definition of the project requirements, and lack of complete understanding and acceptance of the project profile report by the client. Interior Design projects often fail due to ironclad specifications, which may not allow correction or improvisation during execution. The risks on this count can be taken care of, for example by keeping ‘open certain windows’ for later formulation or decision. These are often done by hiring other agencies for work that is likely to occur in different time and space.
A Designer must be extremely careful of individual warrantee and guarantee that when read as a combination often cancels out each other. Complex Interior Design projects formed of several systems (offered by equally varied vendors), have conflicting provisions.
Insurance: Insurance is a risk management investment. By paying a small sum, the premium, risks are conditionally insured. The compensation is invariably for providing an equivalent product or commercial value (at the time of loss or more commonly the depreciated value of the original or cost of replacement) in monetary terms. Insurance is an indemnity against loss. It is a way of contracting out of a risk. A person, company, an organization, or government, pay a small amount -premium, to protect own self from a potential large loss. In case of risk insurance, however, only risks that are stated distinctly in the contract are included for premium compensation, all other risks (including unknown and indeterminable ones) are presumed to be bourn by the party (insurer).
Other losses of Risks : Emotional and such other associated considerations (nose of an actress) are often insured, but by determining a fixed value for it, before a contract is made. Value for the loss of life, is an example of similar nature. Loss of opportunity such as earning, business, etc. due to sickness, injury, strikes, riots, war, etc. can also be insured. Loss due to certain happenings like flood, riot, calamity, malicious damage by any person, devaluation of currency, sudden drop or rise in prices, defaulted business services, blames, lawsuit expenses, fines, compensation payments, etc. can be provisioned through insurance.
Distribution of Risks by Insurance company: A typical insurance company working on life insurance has a large clientele consisting of people of various age, vocation, etc. Of these only few will die, in a year, for which compensation is paid. The premium rates are based on historical data, such life expectancy, rate of natural deaths and caused by accident, etc. An actuary is an expert who compiles and analysis’ statistics in order to calculate insurance risks and premiums.
Reinsurance by Insurance Companies : An insurance company can be in a problem zone, if in one locality many people were to die simultaneously. In such an eventuality, the sudden demand for compensation can be very difficult to meet. To provide for such an eventuality, the insurance company re-insures itself with another company that perhaps has no such liability in the same geographic region. This reinsurance strategy spreads the risks, over time and space.
Geographical affectations of Collective Risks: The insurance company operates on the premise that not all risks happen simultaneously and to all the insurers. Insurance companies plan their business in such a way that in comparison to their premium income the amount to be paid out for compensation is less, resulting in meeting the administrative expenses of business and a reasonable profit.
Often for a very large risk like insurance for nuclear power plant or a space craft, the insurance company or some other commercial entity acts as an underwriter. It may not on its own insure any risk personally, but as a professional body with very strict rules of conduct, manages everything about insurance and takes the first liability. It than, divides and transfers the risk, to several insurance companies by sharing the earned premium.
24 RISK MANAGEMENT –part of the lecture series DESIGN IMPLEMENTATION PROCESSES