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Karachi Insurance Institute Risk Engineering & Risk Management

26 January 2010

Ian Roy

2Marsh

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

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Risk ManagementQuestions 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 ?

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Risk Management Process

Decisions1. ______2. ______3. ______........

Benefits

Costs

? ? ×

? ? ?

?

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Criteria

HAZIDHAZID

QUALITATIVEANALYSISJudgement

QUANTITATIVEANALYSIS

FTA ETA

EngineeredSystem

RISK MANAGEMENT

RISK ASSESSMENT

RISK ANALYSIS

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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, JobDescription, Responsibility

Policy Making

Policy Statements, Corporate Goals, Standards

Feedback

Analysis, Trends, Evaluation, Actions

Implementation

Training, Supervision, Selection, Manning

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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

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Risk Identification and EvaluationA Risk Engineer’s Approach

We will cover:

Risk Identification

Risk Evaluation

Underwriting Factors

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Risk Identification

Types of Risk

Types of Loss

Causes of Loss

Examples

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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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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

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Principal Cause of Loss (Onshore)

Nat. Hazard8%

Process Upset8%

Design Error5%

Mech. Failure46%

Operational Error18%

Unknown15%

Percent of Losses

Average Loss (US$ million)

0

20

40

60

80

100

120

140

Nat.Hazard

ProcessUpset

DesignError

Mech.Failure

OperationalError

Unknown

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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 2%

Underlying causes of accidentsNuclear industry data, The Chemical Engineer, 1999

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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

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How is Risk Evaluated ?

Risk is a function of:

Frequency / Probability

Consequences / Severity

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Risk Evaluation – Risk Matrices

4 - Catastrophic C B A A

3 - Critical D C B A

2 - Marginal D D C B

1 - Negligable D D D C

1- Unlikely 2 - Occasional 3 - Probable 4 - Frequent

Increasing Frequency

Incr

easi

ng C

onse

quen

ce

CONSEQUENCE - People / Reputation / Environment / Assets

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Risk Evaluation – Risk Matrices

Category Description

A UnacceptableShould be mitigated with high priority by engineering and/or administrative controls to a risk of ‘C’

B UndesirableShould be mitigated by engineering and/or administrative controls to a risk of ‘C’

C Acceptable with controlsShould be verified that procedures or controls are in place

D Acceptable as is No mitigation required

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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

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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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1000 m0

Congested Area

.70 bar

.35 bar

.20 bar

.10 bar

.05 bar

Overpressures

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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

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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

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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

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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

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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

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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

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Good separation

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Congested Layout

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Open Layout

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Fixed Protection and Sloping Floor

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Qualitative Risk Ranking: Software

EngineeringStandards

Modifications Operations Maintenance Inspection Safety

People Systems

CorporatePolicies

CorporatePolicies

Software Features

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Qualitative Risk Ranking Emergency Control

Detection Response Control

Flammable Gas DetectionFire Detection

CommunicationsEmergency Plans

Fixed Fire ProtectionMobile Fire ProtectionFire Water SystemsFire Fighting Service

Mutual AidOther Emergency Services

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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

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Risk Quality

Hardware

Software

EmergencyResponse

OverallScore

Well above average

Better than average

Better than average

Overall - Better than averageA

vera

ge

Po

or

Bas

ic

Go

od

Exc

elle

nt

Overall Risk Benchmarking Summary

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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”

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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

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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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