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1 Karachi Insurance Institute Risk Engineering & Risk Management 26 January 2010 Ian Roy

2 1 Marsh Risk Management Risk Management - Definition – The identification, analysis and economic control of those risks that can threaten the assets or earning capacity of the organisation. Why manage risk? – Risks impact company goals and threaten future viability –...only by effective evaluation and assessment of risk can we hope to understand and manage the current and future challenges facing our company - CEO, Major Energy Company

3 2 Marsh Risk Management Questions to be answered Where do the risks come from? How big are they? What are the major contributors? What are the risks sensitive to, and how can they be changed? What level of risk does the company find intolerable, what is considered trivial? What is it worth doing to reduce the risk ?

4 3 Marsh Risk Management Process Decisions 1. ______ 2. ______ 3. ______.. Benefits Costs ??× ??? ? ALARP Criteria HAZID QUALITATIVE ANALYSIS Judgement QUANTITATIVE ANALYSIS FTA ETA Engineered System RISK MANAGEMENT RISK ASSESSMENT RISK ANALYSIS

5 4 Marsh The Risk Management Cycle Measurement Audit, Monitoring, Sampling, Inspection, Checking, Identification External Influence Laws, Industry Standards, Stake Holder Pressure, Public Concern, Company Image Interpretation Procedures, Methods, Job Description, Responsibility Policy Making Policy Statements, Corporate Goals, Standards Feedback Analysis, Trends, Evaluation, Actions Implementation Training, Supervision, Selection, Manning

6 5 Marsh Alternatives for Risk Accept – Knowingly: Identify, Evaluate and Accept – Unwittingly Reduce – Requires prior identification Avoid – Modification of system – Modification of lifestyle Spread – Joint ownership – Multiple Facilities Transfer – Insurance

7 6 Marsh Risk Identification and Evaluation A Risk Engineers Approach We will cover: Risk Identification Risk Evaluation Underwriting Factors

8 7 Marsh Risk Identification Types of Risk Types of Loss Causes of Loss Examples

9 8 Marsh Types of Risk – Installation Different Installations have different risks Onshore drilling Marine drilling Onshore production Offshore production Gas Processing Refineries Terminals Petrochemicals Chemicals

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13 12 Marsh Types of Risk – Loss Potential Hazards – Fire – Explosion VCE BLEVE Detonation – Pollution – Flood – Earthquake – Toxic Release – Breakdown Insurance Cover – Property Damage – Business Interruption – Machinery Breakdown – Liability Loss Potential

14 13 Marsh Principal Cause of Loss (Onshore) Percent of Losses Average Loss (US$ million)

15 14 Marsh Underlying Causes of Loss Many accidents happen as a result of a breakdown in management systems Deficient procedures or documentation43% Lack of knowledge or training18% Failure to follow procedures16% Deficient planning or scheduling10% Miscommunication6% Deficient supervision3% Policy Problems2% Other2% Underlying causes of accidents Nuclear industry data, The Chemical Engineer, 1999

16 15 Marsh How are Specific Risks Identified ? Knowledge and experience of industry Knowledge and experience of specific processes Discussions with management and personnel Tour of installations More detailed techniques are available as required e.g. What-If, HazOp, Quantitative Risk Assessment

17 16 Marsh How is Risk Evaluated ? Risk is a function of: Frequency / Probability Consequences / Severity

18 17 Marsh Risk Evaluation – Risk Matrices CONSEQUENCE - People / Reputation / Environment / Assets

19 18 Marsh Risk Evaluation – Risk Matrices CategoryDescription A Unacceptable Should be mitigated with high priority by engineering and/or administrative controls to a risk of C B Undesirable Should be mitigated by engineering and/or administrative controls to a risk of C C Acceptable with controls Should be verified that procedures or controls are in place D Acceptable as isNo mitigation required

20 19 Marsh Risk Evaluation – Property Damage Usually referred to as Estimated Maximum Loss (or EML) For refineries and petrochemical plants the EML scenario is usually a vapour cloud explosion For other plants (or for some locations) it could be: – Jet fire – Tank fire – Vessel disintegration – Natural perils

21 20 Marsh Property Damage – VCE Evaluation Critical factors that affect the magnitude of the VCE EML are – Structure congestion and confinement – Type of hydrocarbon – Volume of vapour cloud – Volume of structure – Asset value concentration – Secondary events Results are dependent on quality of site data Different companies use different methods e.g. TNT equivalent It is not an exact science, there are many assumptions However, SLAM method shows reasonable correlation with actual incidents

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24 23 Marsh VCE Evaluation Damage estimate should be adjusted to reflect – Inflation over insurance and reconstruction period – Fire fighting expenses – Debris removal – Investigations – Other miscellaneous costs All depend on policy wording and basis of values

25 24 Marsh Risk Evaluation – Business Interruption Usually based on Property Damage EML scenarios Sometimes a BI EML scenario does not correspond to a PD EML scenario Requires detailed understanding of unit interdependencies and economics Consider Customer / Supplier Extensions

26 25 Marsh Risk Evaluation – Machinery Breakdown Identify critical equipment for process including utilities (rotating e.g. compressors and static e.g. reactors) Need to consider potential BI impact

27 26 Marsh Risk Evaluation – Liability Difficult to quantify - only limited to the imagination Requires knowledge of neighbouring businesses and residences Depends on separation from neighbours Depends on interaction with third parties, e.g. – Contractors – Customers / suppliers – Partner companies (joint ventures) – Hold harmless agreements

28 27 Marsh Frequency / Probability How to identify the likelihood of an event occurring Various methods – Quantitative Risk Assessment (QRA) – Benchmarking Qualitative Risk Ranking is used by Marsh – Hardware features – Software (Management systems) – Emergency Control

29 28 Marsh Qualitative Risk Ranking – Hardware Location Climate Layout Physical features Utilities reliability Tankage – LPG, atmospheric, refrigerated Process Units – Equipment layout – Fireproofing – Drainage / kerbing – Control room – Process controls – Combustion safeguards – Remote isolation – Depressurisation – Inventory minimisation

30 29 Marsh Good separation

31 30 Marsh Congested Layout

32 31 Marsh Open Layout

33 32 Marsh Fixed Protection and Sloping Floor

34 33 Marsh Qualitative Risk Ranking: Software Engineering Standards ModificationsOperationsMaintenanceInspectionSafety PeopleSystems Corporate Policies Software Features

35 34 Marsh Qualitative Risk Ranking Emergency Control DetectionResponseControl Flammable Gas Detection Fire Detection Communications Emergency Plans Fixed Fire Protection Mobile Fire Protection Fire Water Systems Fire Fighting Service Mutual Aid Other Emergency Services

36 35 Marsh Qualitative Risk Ranking Achieved by: – Detailed survey of installation – Discussions with management and site personnel – Audit of procedures and compliance checks – Comparison with Marsh risk ranking based on world-wide experience Key benefits: – Useful as broking tool – Appraises weaknesses and strengths on a world-wide scale – Gives independent viewpoint – Provides basis for risk reduction programme

37 36 Marsh Risk Quality Hardware Software Emergency Response Overall Score Well above average Better than average Overall - Better than average Average Poor Basic Good Excellent Overall Risk Benchmarking Summary

38 37 Marsh Risk Control and Improvement All serious risks should be addressed, i.e. eliminated or controlled by management Risk Engineering survey develops Risk Improvement Recommendations, which when implemented lead to improved quality and control of risk This will provide: – Reduction in (un)insured losses – Improvement in corporate image – Favourable premium negotiation – Reduction in total cost of risk

39 38 Marsh Underwriting Factors Hardware / Software / Emergency Control Rating Improvement Exposure Estimated Maximum Loss – Property Damage / Machinery Breakdown / Business Interruption / Operators Extra Expense Scope of cover Loss history Basis of sum insured – Indemnity, re-instatement, actual Retention – Deductible, loss limit, waiting period

40 39 Marsh Risk Identification and Evaluation Conclusions – Requires knowledge and understanding of operations – Achieved by site and management audit – Qualitative analysis of exposures and quantitative consequence assessments – More detailed alternatives available – Provides basis for risk control programme – Enables structuring and placing of risk financing strategy


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