www.marsh.com

Risk Management & Terrorism Events An Insurance Approach

26 January, 2010

Ian Roy

2Marsh

Terrorism and the Energy Market

Events in the Energy market are relatively rare– Saudi Aramco Truck Bomb 1996

Target was military USD 2 bbl price hike

– 2007 PEMEX pipe-line bombings, Mexico Small PD damage, large seepage and pollution claim.

– 2008 to 2010, 6 bombs by environmentalist in British Columbia, Canada

– Bombs defused Mozdok-Tiblisi pipe-line

Underwriters generally operating with 0 % loss ratios

Historically little technical engineering involvement.

Energy Risks perceived as low?– Good protection due to strategic nature of assets

3Marsh

Estimated Maximum Loss (EML)Why is it important to estimate the size of potential losses in advance ?

Insurer’s perspective:– provides a quantitative measure

of the risks they are underwriting– sets the level of capacity that can

be committed to the risk– provides quantitative

understanding of accumulation (e.g. location) issues

– internal governance

Client’s perspective:– supports informed decision

making regarding the design of the insurance programme loss limits vs. EML effective use of market

capacity– provides supportable basis for

purchase of limits of insurance (internal governance)

– a potential means of saving premium (loss limits)

4Marsh

Terrorism Estimated Maximum Loss (EML)

Methods available for generation of Estimated Maximum Loss (EML) values related to Terrorism risks– method developed to meet the requirements of project owners and

project lenders – also applied to oil, gas, petrochemical and other types of “non

energy” related manufacturing facilities

Supports informed decision making about purchased limits of Terrorism insurance

Draws upon specialist resources– engineering/consequence modelling– client HSE, operations personnel– security specialists

5Marsh

Risk Measurement: Estimated Maximum Loss (EML)How big are potential losses?

Risk Measurement

Likelihood of Losses Occurring

Consequences of Losses

Assessment of Quality of Risk Control Features

Assessment of Quality of Risk Control Features

Assessment of Quality of Risk Control Features

Assessment of Quality of Risk Control Features

Assessment of Quality of Risk Control Features

Assessment of Quality of Risk Control Features

Analytical risk-management approach using Consequence Tools

6Marsh

Marsh EML Methodology – what it is and what it is not

What it is– Property loss estimate– Business Interruption loss estimate– 3 bomb type scenarios placed at specific site locations.– Could consider deliberate/targeted release of inventory

What it is not– It is not a prediction of the terrorism attack (reasons, target or

likelihood)– It does not identify the most likely scenarios – Does not consider rocket/airplane type attack– Does not specifically consider explosions at offices/buildings– Does not consider knock-on effects

7Marsh

Marsh EML Methodology – Three generic scenarios

1. Truck containing some 4 t of a TNT type explosive igniting at one of the entrance gates.

2. Car containing some 1 t of a TNT type explosive driven on site and igniting near the highest value assets.

3. Human/Backpack bomb containing some 25 kg of a TNT type explosive taken on site by a human being and igniting near the highest value assets.

8Marsh

Marsh EML Methodology – EML and the report

EML: what we need– Property replacement values– Site Lay out, congestion and confinement levels– Gate location (HW) and security checks (SW)– External lay out (public / private roads, access to the areas)

EML: Tools we use– SLAM– TNT vs. Ethylene Oxide equivalency file

Report: what we also need– Security hardware (gate, fences, etc.)– Security practices on site (controls, explosive detectors, etc.)– Security measures off site– Terrorism simulation / drills practices

9Marsh

Risk Measurement What is SLAM?

Risk assessment tool for clients to facilitate ..

– Property Damage loss limits– Business Interruption exposures– Liability studies

Easy to use design tool to support ...– plant layout– buildings location and design

Tool to facilitate insurance placement by providing the Underwriter with a realistic Estimated Maximum Loss based on credible events applied consistently across the energy risk spectrum

Developed with Shell and Imperial College London

10Marsh

Risk Measurement: ConsequencesWhy was SLAM developed?

EML evaluation aspect

Modelling approach

Plant type

Plant layout

Source terms

Explosion epicentres

Pressure-distance profile

Damage assessment

Loss History

SLAM versus TNT models

Fundamental, deflagration-based, tuned to Loss History

Sensitive to inherent risk type

Penalises poorly laid out or highly congested plant

Volume-based structures … requires less mass for an equivalent explosion

Centred on process structures

Matches observed "far-field" effects

Differentiates between buildings, tankage and process plant

Models small/large release events … models major losses

11Marsh

Fire & Blast Damage Allocation

Overpressure(bar)

Process Plant Tankage Buildings Machinery

>0.7

0.70 – 0.35

0.35 – 0.20

0.20 – 0.10

0.10 – 0.5

100

80

20

5

-

100

100

100

50

-

100

100

100

100

50

80

40

-

-

-

12Marsh

Example – Truck Bomb parked on public roadAdjacent to Strategic high value asset – EML USD 380 million

11

16

10

13

12

20 16 19

18

16

16

16

16

16

15

15

15

15

15 15

15

11 11

11

11

3

4

9

6

6

17145

7

157

6

17

10 10

10 10

10 10

10 10

10

10

14 13

8

8

9

54

1

2

5

3

2

1

0 500m

0.70 bar

0.35 bar

0.20 bar

0.10 bar

0.05 bar

13Marsh

Example – Car Bomb driven into assetsAssumed that in heart of the strategic asset – EML USD 290 million

11

16

10

13

12

20 16 19

18

16

16

16

16

16

15

15

15

15

15 15

15

11 11

11

11

3

4

9

6

6

17145

7

157

6

17

10 10

10 10

10 10

10 10

10

10

14 13

8

8

9

54

1

2

5

3

2

1

0 500m

0.70 bar

0.35 bar

0.20 bar

0.10 bar

0.05 bar

14Marsh

Example – Bag Bomb Carried on-siteAssumed that in heart of the strategic asset – EML USD 130 million

11

16

10

13

12

20 16 19

18

16

16

16

16

16

15

15

15

15

15 15

15

11 11

11

11

3

4

9

6

6

17145

7

157

6

17

10 10

10 10

10 10

10 10

10

10

14 13

8

8

9

54

1

2

5

3

2

1

0 500m

0.70 bar

0.35 bar

0.20 bar

0.10 bar

0.05 bar

15Marsh

Re-build times and Business Interruption

Overpressure(bar)

Process PlantHeavy

Machinery

BuildingsCoolingTowers

Tankage Average Site

Guide Interruption Months

>0.70 bar

0.35 bar

0.20 bar

0.10 bar

0.05 bar

18 to 36

18 to 24

6 to 9

3 to 6

0

12 to 15

9 to 12

0

0

0

6 to 9

6 to 9

6 to 9

6 to 9

3 to 6

9 to 12

9 to 12

9 to 12

6 to 9

0

18 to 24

18 to 24

6 to 9

3 to 6

0

The following outlines likely interruption periods following damage on a typical process plant

16Marsh

Terrorism Estimated Maximum Loss (EML): Property Damage

1 Threat & Vulnerability analysis – potential threats identified with assistance of security consultants

(location specific)– modes of likely attack identified with security consultants

2 Project risk profile generated – probability and direct consequences of attack evaluated

e.g. high explosive blast effects, vapour cloud explosion– EML calculated

3 Risk mitigation – review security procedures and security infrastructure– elemental system re-design (apply control systems) to mitigate

risks and reduce calculated EML

A three step approach:

17Marsh

Terrorism Estimated Maximum Loss (EML)Without effective vehicular access controls

Threat Scenario:1. Large Truck Bomb (4 tes TNT)

detonated at EPF access gate

2. Car Bomb (1 tes TNT) detonated inside main process area

3. Bag Bomb (25 Kg TNT) hand-carried in to process area and detonated

4. Explosion following deliberate release of LPG from storage bullets located on main site

Without Effective Controls

(Limited Threat Mitigation)

USD 142 mm

18Marsh

Terrorism Estimated Maximum Loss (EML)With effective vehicular access controls in place

Threat Scenario:

1. Large Truck Bomb (4 tes TNT) detonated at access gate

2. Car Bomb (1 tes TNT) detonated inside main process area

3. Bag Bomb (25 Kg TNT) hand-carried in to process area and detonated

4. Explosion following deliberate release of LPG from storage bullets located on main site

Current Controls:

• Earth berm around site

• 24/7 armed access control/search points

• Hardened search & hold areas

• Blast walls at access points

• Restricted/dedicated “onsite only” vehicles kept

inside perimeter

Current Controls:

• Sniffer dogs

• Personnel ID and vehicle access control systems

• Vetting & background checks of local staff

• Permit system for zoned work areas on site

USD 22 mm

19Marsh

Risk Management and Terrorism Events

Marsh have developed procedures and methodologies for EML evaluation

Combined with a view of:– Likely modes of attack– Adequacy of safeguards

A Risk Profile can be generated

Mitigation plans can be applied or reviewed

Elemental system re-design can be conducted

www.marsh.com