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Risk Management Risk Management - Definition

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Presentation on theme: "Risk Management Risk Management - Definition"— Presentation transcript:

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

1 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

2 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 ?

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

4 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

5 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

6 Risk Identification and Evaluation A Risk Engineer’s Approach
We will cover: Risk Identification Risk Evaluation Underwriting Factors

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

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

9 Piper Alpha Explosion 6th July 1988
Fire and Explosion and escalation Ship Collision, passing or supply ship? Structural Failure Corrosion , overflying, mechanical failure Hurricane or Windstorm Helicopter Collision Piracy

10 Total – Normandy Le Havre
Refinery 430,000 barrels / day Research centre – not refinery 3rd Party tanks 2 crude / 2 vacuum Duplication Cat cracker Constructing hydro cracker Pipeline to neighbour – polyethylene and naphtha cracker Crude from storage at sea front Rail and truck loading Jetties for export – pipeline to rest of France Fire and Explosion hazards MB with large compressors Terrorism – strategic asset Slugcatchers, process VCE

11 Shell Pernisdv Rotterdam
Refinery + petrochemical complex 4 separate operators – neighbours – Shell, Lyondell Basell + others 3rd Party naphtha cracker Now divested operations but originally 1 owner Flooding Fire and Explosion (FCC, Gas Plant, Platformer, VCE) Vessel disintegration (hydrocracker) BI – Supplier extension, customer extension 3rd Party liability – HF alkylation process – toxic hazards

12 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

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

14 Underlying Causes of Loss
“Many accidents happen as a result of a breakdown in management systems” Deficient procedures or documentation 43% Lack of knowledge or training 18% Failure to follow procedures 16% Deficient planning or scheduling 10% Miscommunication 6% Deficient supervision 3% Policy Problems 2% Other Underlying causes of accidents Nuclear industry data, The Chemical Engineer, 1999

15 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

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

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

18 Risk Evaluation – Risk Matrices
Category Description 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 is No mitigation required

19 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

20 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

21

22 1000 m Congested Area

23 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

24 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

25 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

26 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

27 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

28 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

29 Good separation

30 Congested Layout

31 Open Layout

32 Fixed Protection and Sloping Floor

33 Qualitative Risk Ranking: Software
Software Features Corporate Policies People Systems Corporate Policies Engineering Standards Modifications Operations Maintenance Inspection Safety

34 Qualitative Risk Ranking Emergency Control
Detection Response Control 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

35 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

36 Overall Risk Benchmarking Summary
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

37 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”

38 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

39 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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