Risk Management
This book is a part of the course by Jaipur National University, Jaipur.
This book contains the course content for Risk Management.
JNU, Jaipur
First Edition 2013
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content whenever the need arises, and to vary it at any time without prior notice.
Index
I. Content....................................................................... II
II. List of Figures............................................................ V
III. List of Tables...........................................................VI
IV. Abbreviations........................................................ VII
V. Case Study.............................................................. 109
VI. Bibliography.......................................................... 114
VII. Self Assessment Answers................................... 116
Book at a Glance
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Contents
Chapter I........................................................................................................................................................ 1
Risk Management......................................................................................................................................... 1
Aim................................................................................................................................................................. 1
Objectives....................................................................................................................................................... 1
Learning outcome........................................................................................................................................... 1
1.1 Introduction............................................................................................................................................... 2
1.2 Types of Risks........................................................................................................................................... 2
1.3 Risk Management..................................................................................................................................... 3
1.3.1 Aim of Risk Management......................................................................................................... 3
1.4 Principles of Risk Management................................................................................................................ 4
1.5 Risk Management Perils........................................................................................................................... 4
1.5.1 Risk Management of Life Perils............................................................................................... 5
1.6 Risk Management Process........................................................................................................................ 5
1.7 Risk Management - Construction Style.................................................................................................... 8
Summary...................................................................................................................................................... 12
References.................................................................................................................................................... 12
Recommended Reading.............................................................................................................................. 12
Self Assessment............................................................................................................................................ 13
Chapter II.................................................................................................................................................... 15
Risk Assessment, Analysis and Evaluation............................................................................................... 15
Aim............................................................................................................................................................... 15
Objectives..................................................................................................................................................... 15
Learning outcome......................................................................................................................................... 15
2.1 Introduction............................................................................................................................................. 16
2.2 Risk Assessment..................................................................................................................................... 16
2.2.1 Risk Identification and Categorisation................................................................................... 16
2.2.2 Risk Description..................................................................................................................... 17
2.2.3 Risk Estimation....................................................................................................................... 17
2.3 Risk Analysis.......................................................................................................................................... 18
2.3.1 Risk Identification and Analysis Methods.............................................................................. 18
2.3.2 Risk Profile............................................................................................................................. 19
2.4 Risk Evaluation....................................................................................................................................... 19
2.5 Risk Reporting and Communication....................................................................................................... 20
2.5.1 Internal Reporting................................................................................................................... 20
2.5.2 External Reporting.................................................................................................................. 21
2.6 Risk Management: Statistical Methods.................................................................................................. 21
2.6.1 PML........................................................................................................................................ 21
Summary...................................................................................................................................................... 22
References.................................................................................................................................................... 22
Recommended Reading.............................................................................................................................. 22
Self Assessment............................................................................................................................................ 24
Chapter III................................................................................................................................................... 26
Hazard Management.................................................................................................................................. 26
Aim............................................................................................................................................................... 26
Objectives..................................................................................................................................................... 26
Learning outcome......................................................................................................................................... 26
3.1 Introduction............................................................................................................................................. 27
3.2 Hazard Management............................................................................................................................... 27
3.2.1 Types of Hazards..................................................................................................................... 28
Summary...................................................................................................................................................... 35
References.................................................................................................................................................... 35
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Recommended Reading.............................................................................................................................. 35
Self Assessment............................................................................................................................................ 36
Chapter IV................................................................................................................................................... 38
Risk Management Aspects......................................................................................................................... 38
Aim............................................................................................................................................................... 38
Objectives..................................................................................................................................................... 38
Learning outcome......................................................................................................................................... 38
4.1 Introduction............................................................................................................................................. 39
4.2 Aspects of Risk Management.................................................................................................................. 39
4.2.1 Estate Management . .............................................................................................................. 39
4.2.2 Disaster Management............................................................................................................. 40
4.2.3 Financial Risk Management................................................................................................... 40
4.2.4 Process Industry...................................................................................................................... 40
4.2.5 Insurance................................................................................................................................. 41
4.2.6 Society and Foresight.............................................................................................................. 41
4.2.7 Environment and Health......................................................................................................... 41
4.3 Laws and Acts......................................................................................................................................... 41
4.3.1 Factory Act.............................................................................................................................. 41
4.3.2 The Workmen’s’ Compensation Act ...................................................................................... 42
4.3.3 Bio-Hazards............................................................................................................................ 42
4.3.4 Standard Fire Policy................................................................................................................ 42
4.3.5 Insurance Regulating Development Authority (IRDA) Policies and Measures..................... 42
4.4 Role of Risk Managers............................................................................................................................ 44
4.4.1 Strategies Adopted by Risk Managers.................................................................................... 44
4.4.2 Techniques Adopted by Risk Managers.................................................................................. 45
4.5 Risk Mitigation....................................................................................................................................... 46
4.5.1 Risk Contingency Planning.................................................................................................... 46
Summary...................................................................................................................................................... 47
References.................................................................................................................................................... 47
Recommended Reading.............................................................................................................................. 47
Self Assessment............................................................................................................................................ 48
Annexure I................................................................................................................................................... 50
Engineering Risk Management ................................................................................................................ 50
Annexure II.................................................................................................................................................. 54
Institute Cargo Clauses A, B and C........................................................................................................... 54
Annexure III ............................................................................................................................................... 55
Types of Losses ........................................................................................................................................... 55
Annexure IV ............................................................................................................................................... 61
Inspection . .................................................................................................................................................. 61
Annexure V.................................................................................................................................................. 64
Properties of Chemicals . ........................................................................................................................... 64
Annexure VI ............................................................................................................................................... 67
EML Calculation by Expert Risk Engineer of London for Reinsurance Company . .......................... 67
Annexure VII . ............................................................................................................................................ 69
Recommendations for Risk Improvement . ............................................................................................. 69
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Annexure VIII ............................................................................................................................................ 71
Estimation of PML of an Ammonia Plant by an Engineer of a Public Sector Insurance Company . 71
Annexure IX . ............................................................................................................................................ 72
Estimation of MPL by an Engineer........................................................................................................... 72
Annexure XI . ............................................................................................................................................ 80
Extracts from Swiss-re Publication on Catastrophes ............................................................................. 80
Annexure XII . ............................................................................................................................................ 87
Risk Management Technique as Outlaid by Practicing Expert Risk Engineers following the
RAMP Process (Rosl Analysis and Management for Projects) . ............................................................ 87
Annexure XIII ............................................................................................................................................ 93
Stages of Risk Management as Per Risk Engineers of London ............................................................. 93
Annexure XIV ............................................................................................................................................ 94
Attitude Indication of Risk Management as Seen by Expert Risk Engineers . .................................... 94
Annexure XV . ............................................................................................................................................ 95
Risk Management sequence according to some expert engineers.......................................................... 95
Annexure XVI............................................................................................................................................. 97
Fault Tree Analysis of a Process by an Expert Risk................................................................................ 97
Annexure XVII............................................................................................................................................ 99
Errors and Communication Difficulties Outlined by an Expert Engineer............................................ 99
Annexure XVIII........................................................................................................................................ 100
Disaster Management Technique............................................................................................................. 100
Annexure XIX........................................................................................................................................... 105
List of Certain Commodities and the Nature of Loss or Damage to Which they are
Generally Susceptible............................................................................................................................... 105
Annexure XX . .......................................................................................................................................... 108
Technique for Analysis of Occurrence and Consequences According to Expert Risk Engineers..... 108
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List of Figures
Fig. 1.1 Types of risks..................................................................................................................................... 2
Fig. 1.2 Risk management perils..................................................................................................................... 5
Fig. 1.3 Risk management of life perils.......................................................................................................... 5
Fig. 1.4 Risk management process................................................................................................................. 6
Fig. 2.1 Categorisation of risks..................................................................................................................... 16
Fig. 2.2 Risk Estimation............................................................................................................................... 18
Fig. 3.1 Types of hazards.............................................................................................................................. 28
Fig. 3.2 Human factors.................................................................................................................................. 28
Fig. 4.1 Risk management examination........................................................................................................ 39
Fig. 4.2 Strategies for risk managers............................................................................................................ 45
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List of Tables
Table 2.1 Risk description............................................................................................................................. 17
Table 3.1 Hazard register example................................................................................................................ 29
Table 3.2 (a) Hazard identification............................................................................................................... 30
Table 3.3 (b) Hazard identification............................................................................................................... 31
Table 3.4 Summary of identified hazards and assessment............................................................................ 32
Table 3.5 Prioritising Hazards and Risks...................................................................................................... 33
Table 3.6 Hazard Consequence Rating Table............................................................................................... 33
Table 3.7 Probability Rating Table............................................................................................................... 33
Table 3.8 Risk Priority Table........................................................................................................................ 34
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Abbreviations
BOONT
BOOT
BOT
BPEST
BT
BTO
EDC
EG
EML
EO
FMEA
GMOs
GOP Plant
HAZOP
HCL
ICC
IDLH
IPCL
IRDA
IRR
ISDR
KRIBHCO
LDPE
LOP
LPG
MF
MPL
NPV
OSBL/ISBL
PESTLE
PMBK
PML
PRV
PSA
PVC
RAMP
SRCC
SWOT analysis
TEC
TLV
TNT
UVCE
VC
VCM
WBS
-
Build, Own, Operate and No Transfer
Build, Own, Operate and Transfer
Build, Operate and Transfer
Business, Political, Economic, Social, Technological) Analysis
Build and Transfer
Build, Transfer, Operate
Ethylene Di Chloride
Ethylene Glycol
Estimated Maximum Loss
Ethylene Oxide
Failure Mode & Effect Analysis
Genetically Modified Organisms
Gas Oil Petrol Plant
Hazard & Operability Studies
Hydrogen Chloride
Institute Cargo Clauses
Immediately Dangerous to Life or Health
Indian Petrochemicals Corporation Limited
Insurance Regulating Development Authority
Internal Rate Of Return
The International Secretariat for Disaster Reduction
Krishak Bharati Cooperative Limited
Low Density Polyethylene
Loss of Profit
Liquefied Petroleum Gas
Mutual Fund
Maximum Permitted Level
Net Present Value
Outside the Battery Limits/Inside the Battery Limits
Political Economic Social Technical Legal Environmental
Project Management Body of Knowledge
Probable Maximum Loss
Pressure Relief Valve
Probabilistic Safety Assessments
Polyvinyl Chloride
Risk Assessment and Management Plan
Strike, Riot and Civil Commotion
Strengths, Weaknesses, Opportunities, Threats
Tri Ethylene Glycol
Threshold Limit Value
Trinitrotoluene
Unconfined Vapour Cloud Explosion
Vinyl Chloride
Vinyl Chloride Monomer
Work Breakdown Structure
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Chapter I
Risk Management
Aim
The aim of the chapter is to:
•
introduce the concept of risk
•
discuss risk management
•
analyse the risk management process
Objectives
The objectives of the chapter are to:
•
classify the different types of risks
•
determine the need and aims of risk management
•
state the principles of risk management
Learning outcome
At the end of this chapter, the students will be able to:
•
explain pure, static, dynamic, fundamental, particular and speculative risk
•
discuss the role of reporting in risk management
•
recognise the importance of documentation in risk management
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Risk Management
1.1 Introduction
In general terms, the word 'Risk' means an apprehension or a threat of something unwanted happening. In the words
of James Neill, the concept of Risk usually refers to the probability of loss of a ‘valued resource’. The word 'Risk
' has multiple usages. For example, it may refer to a chance or a probability (“risk of exposure”), a consequence or
impact (“the risk from smoking”), or a perilous situation (“a hazardous waste plant creates a risk”). Interpretations
of the word “risk” have evolved linguistically on the basis of involuntary or voluntary events. For example, “danger”
is often used to describe an involuntary event, whereas “peril” may be used to describe a voluntary event.
Despite the widespread use of this word, there is no single universal definition of the word.
Risk in the context of insurance business implies taking wise investment decisions with correct reading of the market
situation to offset probable losses with gains. Usage of the word “risk” in the context of health and environmental
risks integrates two ideas; firstly that the situation has the potential for detrimental consequences; and secondly that
there is some improbability associated with the circumstances.
There is an uncertainty of whether a hazardous event will occur; when or where it will occur; who or what will be
affected; and the magnitude of the consequences. “Risk”, in this sense, includes both the possibility and the character
of the detrimental event. A statement of risk based solely on one aspect of risk, such as the probability of occurrence,
has been referred to as a single dimensional risk. Financial or insurance risks are primarily single dimensional risks,
as are statements on health risks that are restricted to the chance of occurrence.
1.2 Types of Risks
The basic factors of risk management are:
Fig. 1.1 Types of risks
•
Risks under the pure risk category would be easily recognisable, noticeable and damages are based on the action
of perils. However, it will be very difficult to understand and analyse the speculative risk.
•
Static risks are those which are on account of inherent physical properties of elements. Some elements would
cause more danger when they are kept under cover. On the other hand, some elements would cause more losses
when they are kept uncovered. Even though they are stationary, they are capable of causing losses.
•
Dynamic risk is a loss increasing on account of some activity being triggered as a chain of activities. It is like
a dynamo fitted to a bicycle, the basic activity is to pedal the cycle. While pedalling the bicycle, the wheel
moves and then with the movement of the wheel, another wheel attached to the dynamo also moves, with the
movement of that wheel the dynamo is working, with the working of the dynamo, electricity is produced, with
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the electricity produced, the headlight fitted to the bicycle is illuminated. Basically, the bicyclist is not pedalling
the bicycle for the light; he is pedalling the bicycle to travel. However, that action could lead to the production
of electricity.
•
There are certain fundamental risks which are built-in with the perils. Wherever the fundamental risk exists, they
would cause losses and a study will have to be made on a particular risk basis. Whichever subject or whichever
activity is taken for study, the entire consideration should be made particularly to that risk.
•
Risk management is necessary for each and everyone.
1.3 Risk Management
•
Understanding risk involves the governance function of risk management. Risk management means reducing
the threats posed by known hazards, whilst simultaneously accepting unmanageable risks, and maximising any
related benefits.
•
Organisations face different types of risks in a specific and unconnected manner. There are methods of “definition
and control”, which are collected in a systematic approach known as “Risk Management”, which provides
reasonable defence against the possible verification of harmful events.
•
Risk Management can therefore be defined as “a group of actions that are integrated within the wider context
of a company organisation, which are directed toward assessing and measuring possible risk situations as well
as elaborating the strategies necessary for managing them”.
•
It is also defined as “The process of analyzing exposure to risk and determining how to best handle such
exposure.”
•
Risk Management strategies can be targeted toward all or only some of the “different types of potential risk”,
that is, the specific areas of possible uncertainty that affect the life of a company or organisation.
•
Company risks are normally classified within three large categories:
‚‚ Risks inherent to the external context (e.g.: emergence of unfavourable laws and/or regulations; negative
changes to market conditions; technological innovations that favour competitors; etc.);
‚‚ Risks inherent to operative management (e.g.: non compliance with contractual requirements; possible loss
of market share; possible loss of skills; possible physical damage to personnel; possible environmental
pollution; etc.);
‚‚ Risks inherent to financial management (e.g.: difficulty in collecting accounts receivables; unfavourable
changes in exchange rates; imbalances in liquidity; etc.).
•
Each of these risks may lead to direct and/or indirect damage to the organisation, with economic implications
that may also be considerable in the short, medium and long term.
1.3.1 Aim of Risk Management
•
The basic aim of risk management is to arrive at the possible quantum of loss and then take a decision towards
avoidance. It also takes a decision to transfer, hedge and insure and further reinsure or it could be a combination
of all these.
•
The basic requirements in risk management study lie with the identification of perils, which may affect the
property in a situation under certain severe circumstances. Thus without identifying the perils, which may cause
loss, danger, accident, harm, injury, etc., it will not be possible to move further for quantification.
•
Thus, identification and a detailed study of perils is the most important basic factor of risk management. The
perils could be natural, what normally is called an ‘Act of God’. These perils could take place on the earth, for
instance, earthquake; in water, for instance, tsunami; they could also take place in the air, for instance, lightning
or in the sky like falling objects. The perils could be in property, in elements, in materials, in the stores, in the raw
materials. These could be on account of their physical, chemical, mechanical, biological, electrical properties.
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Risk Management
1.4 Principles of Risk Management
•
There are risk management principles by International standardisation Organisation and by Project Management
Body of Knowledge. A combined view of principles identified by ISO and PMBK is as follows
•
Organisational Context: Every organisation is affected to varying degrees by various factors in its environment
(Political, Social, Legal, and Technological, Societal etc). For example, an organisation may be immune to
change in import duty whereas a different organisation operating in the same industry and environment may
be at a severe risk. There are also marked differences in communication channels, internal culture and risk
management procedures. The risk management should therefore be able to add value and be an integral part of
the organisational process.
•
Involvement of Stakeholders: The risk management process should involve the stakeholders at each and
every step of decision making. They should remain aware of even the smallest decision made. It is further in
the interest of the organisation to understand the role the stakeholders can play at each step.
•
Organisational Objectives: When dealing with a risk it is important to keep the organisational objectives in
mind. The risk management process should explicitly address the uncertainty. This calls for being systematic
and structured and keeping the big picture in mind.
•
Reporting: In risk management communication is the key. The authenticity of the information has to be
ascertained. Decisions should be made on best available information and there should be transparency and
visibility regarding the same.
•
Roles and Responsibilities: Risk Management has to be transparent and inclusive. It should take into account
the human factors and ensure that each one knows it roles at each stage of the risk management process.
•
Support Structure: Support structure underlines the importance of the risk management team. The team
members have to be dynamic, diligent and responsive to change. Each and every member should understand
his intervention at each stage of the project management lifecycle.
•
Early Warning Indicators: Keep track of early signs of a risk translating into an active problem. This is achieved
through continual communication by one and all at each level. It is also important to enable and empower each
to deal with the threat at his/her level.
•
Review Cycle: Keep evaluating inputs at each step of the risk management process - Identify, assess, respond
and review. The observations are markedly different in each cycle. Identify reasonable interventions and remove
unnecessary ones.
•
Supportive Culture: Brainstorm and enable a culture of questioning, discussing. This will motivate people to
participate more.
•
Continual Improvement: Be capable of improving and enhancing your risk management strategies and tactics.
Use your learning’s to access the way you look at and manage ongoing risk.
1.5 Risk Management Perils
•
The perils could be man-made; they could be on earth or in water, or in the air or in the sky. Perils could also
be on account of different things as follows:
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Fig. 1.2 Risk management perils
1.5.1 Risk Management of Life Perils
Life perils could be due to several reasons. The reasons are depicted in the figure below.
Fig. 1.3 Risk management of life perils
1.6 Risk Management Process
Different organisations use different approaches to organise their risk management activities. A commonly used
approach is as follows:
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Risk Management
Fig. 1.4 Risk management process
•
The risk management process is planned and structured.
•
The risk process is integrated with the acquisition process.
•
Developers, users, procurers, and all other stakeholders work together closely to implement the risk process.
•
Risk management is an ongoing process, with continual monitoring and reassessment.
•
A set of success criteria is defined for all cost, schedule, and performance elements of the project.
•
Metrics are defined and used to monitor effectiveness of risk management strategies.
•
An effective test and evaluation program is planned and followed.
•
All aspects of the risk management program are formally documented.
•
Communication and feedback are an integral part of all risk management activities.
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Although the risk management program should be modified as per the organisation’s needs, it should incorporate
the basic characteristics mentioned.
• Planning
Risk planning includes developing and documenting a structured, proactive, and comprehensive strategy to deal
with risk. Key to this activity is the establishment of methods and procedures to do the following:
‚‚ Establishing an organisation to take part in the risk management process.
‚‚ Identify and analyse risks.
‚‚ Develop risk-handling plans.
‚‚ Monitoring or tracking risk areas.
‚‚ Assigning resources to deal with risks.
• Assessment
Risk assessment involves two primary activities, risk identification and risk analysis. Risk identification begins
early in the planning phase and continues throughout the life of the project. The following methods are often used
to identify possible risks:
‚‚ Brainstorming.
‚‚ Evaluations or inputs from project stakeholders.
‚‚ Periodic reviews of project data.
‚‚ Questionnaires based on taxonomy, the classification of product areas and disciplines.
‚‚ Interviews based on taxonomy.
‚‚ Analysis of the Work Breakdown Structure (WBS).
‚‚ Analysis of historical data.
When identifying a risk it is essential to do so in a clear and concise statement. It should include three
components:
1. Condition - A sentence or phrase briefly describing the situation or circumstances that may have caused concern,
anxiety, or uncertainty.
2. Consequence – A sentence describing the key negative outcomes that may result from the condition.
3. Context – Additional information about the risk to ensure others can understand its nature, especially after the
passage of time.
Another part of assessment is risk analysis. It is the procedure of examining each risk to refine the risk description,
isolate the cause, calculate the probability of occurrence, and determine the nature and impact of possible effects.
The result of this process is a list of risks rated and prioritised according to their probability of occurrence, severity
of impact, and relationship to other risk areas
• Handling
Risk handling is the process that identifies, evaluates, selects, and implements options for mitigating risks. There
are two approaches that are used in handling risk.
‚‚ Employ options that reduce the risk itself.
(It usually involves a change in current conditions to lessen the probability of occurrence.)
‚‚ Use options that reduce the negative impact to the project if the risk condition should occur.
(It is often employed where risk probability is high.)
• Monitoring
The process of continually tracking risks and the effectiveness of risk handling options to ensure risk conditions do
not get out of control is known as ‘Risk Monitoring’. This is achieved by identifying the baseline risk management
plans, understanding the risks and risk handling options, establishing meaningful metrics, and evaluating project
performance against the established metrics, plans, and expected results throughout the acquisition process. Continual
monitoring also enables the identification of new risks that may become apparent over time. It also discovers the
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Risk Management
interrelationships between various risks.
• Documentation
Risk documentation consists of recording, maintaining, and reporting risk management plans, assessments, and
handling information. It also includes recording the results of risk management activities, providing a knowledge
base for better risk management in later stages of the project and in other projects. It is absolutely essential for the
current, as well as future, projects. Documentation should include as a minimum the following information:
‚‚ Risk management plans.
‚‚ Project metrics to be used for risk management.
‚‚ Identified risks and their descriptions.
‚‚ The probability, severity of impact, and prioritisation of all known risks.
‚‚ Description of risk handling options selected for implementation.
‚‚ Project performance assessment results, including deviations from the baseline plans.
‚‚ A record of all changes to the above documentation, including newly identified risks, plan changes, etc.
1.7 Risk Management - Construction Style
Some of the perils are on account of construction styles like
BT
Build and Transfer
BTO
Build, Transfer, Operate
BOT
Build, Operate and Transfer
BOOT
Build, Own, Operate and Transfer
BOONT
Build, Own, Operate and No Transfer
Some of the infrastructure projects of high value, which are being executed now-a-days, are on the BOOT and the
BOONT systems. With this contractors, who were earlier responsible for only the construction activity and got
rid of their responsibilities once the property was completely handed over on receipt of payment, now have to be
responsible for not only owning such property but also for operating and allowing the owner to avail the facility
for his purpose.
Quantification
•
Loss could be material damage; it could be total loss or partial loss. The loss could be life damage, again it
could be total loss or partial loss, the loss of life and material can also lead to consequential losses, like business
interruption. Though the factory becomes silent on account of the accident, while other expenses are on hold,
some of the expenses continue during that period like rent, tax, etc.
•
Therefore, consequential loss policies have to cover these. Further damage caused by an accident within the
premises of a plant could also lead to certain damages beyond the premises, like a car on the road meeting an
accident, could not only itself be damaged, injure people within the car but can also cause damage to others’
property and injuries to others’ life. This is the third party liability.
•
Risk management calls for quantification of own losses, consequential losses and third party losses. The losses
have to be estimated with the sequence of damage or incidents taking place and the chain reactions based on
these.
Analysis
•
Having analysed, the quantum of possible loss based on the data of past happenings and history, the estimated
loss could be reasonably arrived at a realistic level. Thus we arrive at the quantum of loss on account of a set
of perils acting at any time under a set of circumstances.
•
Having arrived at the quantum of loss, it is necessary to take appropriate decisions. The decisions could be either
to bear all losses without bothering any further or to find a partner who will share the losses for transferring the
risk, losses to another company that is an insurance company. Risk management decides the quantum of possible
loss, at any plant, the level of losses, which could be borne, the level to which he can arrange somebody to
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share and the quantum to be transferred to the insurance company. Risk management decides to bear, to share,
to transfer.
•
The insurance company will also have to make a thorough risk management study to accept the risk, to bear
such losses on behalf of somebody and further they may have to make a study of the extent, they can bear, they
can share and they have to transfer. The share here is basically called co-insurance and the transfer is called
reinsurance.
•
Risk management study could now become necessary for the reinsurance people. They will make an in-depth
study of the quantum of losses, that could be and based on their capacity, they may have to decide to the extent
they would like to bear, the extent they would like to share and extent they are required to transfer and their
transfer would be to the pool. It is for the individual owner to initially study the possible perils at strike, the
hazardous conditions they can create, the quantum of losses they could make and to take a decision to the extent
to which he would like to bear, he would like to share, he would like to transfer.
•
Similarly, for the insurance companies, when a decision is taken to transfer the risk to somebody, some
consideration would become necessary to insure for the loss. The insured has cover from an insurance company
by paying a premium that is the consideration, based on the property identified against a set of perils, at a rate
decided by the company for such transfer of risk. The rate could be a tariff rate or agreed rate or a market rate
or a rate based on risk management study.
Insurance
•
Identification of perils
•
Identification of property / materials / machines / life, etc.
•
Identification of values
•
Arrival at sum insured/assured/identified/agreed/estimated
•
Arrival at premium
•
All based on inspection
Inspection
To be of authentic nature, risk management suggests estimation of loss only on inspection, which literally means
looking at the object at the place of its location that is on-site view. However, before going to the actual site or plant
or place of the activity, it is necessary to inspect the site with reference to various detailed data and maps.
The first inspection would be of the world map especially designed by Swiss-re, Munich-re, natural disasters like
volcanoes, earthquakes, wind movements, storms, and cyclones. We would be in a position to understand, the
quantum of perils or the type of disaster to which the plant is subjected.
•
Example: Inspection of a plant at Balewadi, Pune, Maharashtra, India
‚‚ – it would be necessary to inspect the map of India with regard to the coastal line, river line, mountain line,
hill range, wind direction, seasons of the year, monsoons, cyclone direction, etc.
‚‚ Then it would become necessary to study the map of Maharashtra, so that the surroundings of Pune would
also been known very clearly.
‚‚ Then we should study the map of Pune and special attention should be paid to the location of fire brigades,
the route from those fire brigades to the plant, the width of such approach roads, the distance would also
be necessary.
‚‚ Then the source of water at that location. A study of the law and order situation of Pune city would also
become necessary.
‚‚ Then a detailed study should be made of Balewadi itself, this will help us know the number of industries,
plants, manufacturing units, located around the plant, which we are going to inspect for the Risk management
study. Special attention should be given to the reserve quantum of water, the system established for security,
the force adopted, engaged for fire fighting and the number of fire fighting engines they have and all such
details. This will help us further to have a mutual aid system; So that whenever any incident takes place in
any plant, all resources put together, can fight for a quick release.
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Risk Management
‚‚ Then the actual layout plan of the plant should be studied. Before surveying from inside, a survey should also
be made along the periphery of the compound wall from outside the ground. This will enable to understand
the possible perils which can strike unnoticed from outside, even though they are just on the other side of
the compound wall, they are not visible to us, they could be in a greater position to damage the property
which is inside.
‚‚ There could be some gutter, natural flow of water, and some authorised residences, some unauthorised
residences and some people might even use the compound wall itself, as the wall of their houses. A study
from along the periphery from outside would give us various inputs, which should be useful while making,
while analysing, while evaluating the quantum of losses or the chances of danger.
‚‚ Then a complete study within the entire boundary wall of the plants must be made very carefully. A study
should be made along with the well detailed layout plan, examining each and every building, plant, godown,
workshop, scrap yard, store yard, dump yard, in gate, out gate, reserve water tank, hazardous goods storage,
finished goods storage, raw material storage, overhead tank and if any installation of smoke detectors, fire
detectors, smell detectors, weather detectors and installation of sprinklers, raisers, automatic wet raisers,
sprinklers, etc.
‚‚ The system adopted for maintaining the premises is the most important aspect; in addition to that the condition
of the building, the quality of the structure would give additional inputs. Having seen the entire plant very
carefully, having evaluated the quantum of value of estate, category wise, duly listed, it becomes necessary
to study the flow chart. The flow chart would indicate the entire process or the activity of the plant.
‚‚ With the incoming raw materials from various directions being finished, adjusted and then moving towards
the manufacturing unit to come out as the final output. All actions one after one, would lead us to understand
the scope of all activities and the system adopted in any section.
‚‚ All of the plants would need some type of energy to undergo the process of manufacture. It could be boilers,
pressure vessels, coal, gas, petrol, diesel or electricity or it could be to some extent very rarely, solar or
electricity generated by wind. The study of the source of energy, the level of that energy and the quantum
of energy utilised for a day, will give an indication and help understand the gravity of the situation.
‚‚ Further, if it is a chemical reaction plant, where many types of raw materials, under different processes
being brought to one central processing unit for the final product, the study calls for very high skills. Where
it goes through the chemical reactive manufacturing system and then comes out altogether a new product.
It maybe that it can’t be seen with the naked eye, as it is completely sealed and covered and concealed
in a container, wherein we are not in a position to check what is going inside and what has come out and
unable to check what is really happening during that manufacturing process, an in-depth study knowledge
is a must for the risk manager.
‚‚ An in-depth study of the physical, chemical, biological, characters of these raw materials, should be made
very carefully, in case either the energy or the finished material or the raw material is of hazardous nature.
Then a team of engineers, who are prepared to undergo this hazardous inspection, should make further
detailed study based on actual inspection of the manufacturing process very thoroughly.
‚‚ The atmosphere within the plant will not be so cosy, the inspectors will have to undergo all sorts of difficulties,
dangerous situations, be uncomfortable, be uneasy while doing the inspection. Without such proper inspection,
the risk manager would not be in a position to evaluate the quantum of losses or the chain of reactions.
‚‚ So the team of engineers should be well prepared, well taught, well guided, well treated and well
examined.
‚‚ For actual site inspection in the plant they may have to wear helmets, they may have to wear thick heavy
shoes, put on goggles, or some uniform. They have to skip their smoking, chewing habits and they cannot
carry any restricted items. It will be difficult to look up or look down, so easily in such situations. Morning to
evening they will have to be moving from one end to the other end, carefully observing, critically watching,
mentally analysing all the processes which are taking place in that plant.
Team
The team of inspectors depending upon the type of activity or the process of manufacture will consist of various
professionals, like
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•
Engineers: civil, mechanical, electrical, chemical, automobile computer, electronics, structural architecture,
etc.
•
Scientists: physicists, chemists, biologists, etc.
•
Dreamers, imaginers, pessimists, optimists, realists, averagists, standardists.
•
Accountants: standard, chartered, cost, professional
•
Lawyers/Advocates, legal experts
•
Doctors, Chemists.
Thus, the well-prepared team should thoroughly inspect the plant for identifying the perils, the circumstances, the
sequence in which the incident could have taken place and to identify the property at risk and estimate the loss.
Thus the entire process is to identify the peril and property and estimation of quantity.
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Risk Management
Summary
•
Risk in the specific context of insurance business implies taking wise investment decisions with correct reading
of the market situation to offset probable losses with gains. Usage of the word 'Risk' in the context of health and
environmental risks integrates two ideas; firstly that the situation being discussed has the potential for detrimental
consequences; and secondly that there is some improbability associated with the circumstances.
•
There is uncertainty whether a hazardous event will occur; when or where it will occur; who or what will be
affected; and the magnitude of the consequences. 'Risk', in this sense, includes both the possibility and the
character of the detrimental event. A statement of risk based solely on one aspect of risk, such as the probability
of occurrence, has been referred to as a single dimensional risk.
•
Types of risks are: pure risk, speculative risk, dynamic risk, static risk, fundamental risk, particular risk.
•
Risk Management can be defined as “a group of actions that are integrated within the wider context of a company
organisation, which are directed toward assessing and measuring possible risk situations as well as elaborating
the strategies necessary for managing them”
•
The basic aim of Risk Management is to arrive at the possible quantum of loss and then take a decision towards
avoidance. It also takes a decision to transfer, hedge and insure and further reinsure or it could be a combination
of all these.
•
Risk planning includes developing and documenting a structured, proactive, and comprehensive strategy to
deal with risk
•
Risk assessment involves two primary activities, risk identification and risk analysis. Risk identification begins
early in the planning phase and continues throughout the life of the project
•
Risk handling is the process that identifies, evaluates, selects, and implements options for mitigating risks.
•
The process of continually tracking risks and the effectiveness of risk handling options to ensure risk conditions
do not get out of control is known as ‘Risk monitoring’
•
Risk documentation consists of recording, maintaining, and reporting risk management plans, assessments, and
handling information.
References
•
Fundamentals of risk management. Available at: <http://www.ewf.be/media/documentosDocs/doc_16_ewf644-08-fundamentals-of-risk-management.pdf> Accessed 1st March 2011
•
Risk Management Chapter 5. Condensed GSAM Handbook. Available at: < http://www.ewf.be/media/
documentosDocs/doc_16_ewf-644-08-fundamentals-of-risk-management.pdf> Accessed 1st March 2011
•
Risk Management. Available at: <http://www.investorwords.com/4304/risk_management.html> Accessed 1st
March 2011
•
Understanding risk: concepts and elements. IGNOU. Available at: <http://www.egyankosh.ac.in/
bitstream/123456789/3142/1/Unit%2002.pdf> Accessed 1st March 2011
Recommended Reading
•
Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective Risk Management
[Paperback]. Paul Hopkin. Publisher: Kogan Page (June 28, 2010).Paperback: 384 pages.
•
The Complete Idiot’s Guide to Risk Management [Paperback].Annetta Cortez. Publisher: Alpha (February 2,
2010). Paperback: 368 pages
•
The Essentials of Risk Management [Hardcover].Michel Crouhy, Dan Galai, Robert Mark. Publisher: McGrawHill; 1st ed. (December 14, 2005). Hardcover: 416 pages.
12/JNU OLE
Self Assessment
1. The concept of 'risk' usually refers to the ___________ of loss of a ‘valued resource’.
a. quantity
b. quality
c. probability
d. calculation
2. Which type of risk would be easily recognisable, noticeable and damages are based on the action of perils?
a. Static
b. Pure
c. Dynamic
d. Fundamental
3.
_______ are those which are on account of inherent physical properties of elements.
a. Particular risk
b. Speculative risks
c. Dynamic risk
d. Static risks
4. Dynamic risk is a loss accruing on account of some __________ being triggered as a chain of activities.
a. activity
b. tragedy
c. disaster
d. calamity
5. State which of the following is true.
a. The process of analyzing exposure to risk and determining how to best handle such exposure
b. The process of analyzing exposure to risk and determining how to best handle such exposure
c. The process of analyzing exposure to risk and determining how to best handle such exposure
d. The process of analyzing exposure to risk and determining how to best handle such exposure
6. The basic aim of risk management is to arrive at the possible quantum of loss and then take a ___________
towards avoidance.
a. step
b. decision
c. move
d. action
7. Even though ___________ are stationary, they are capable of causing losses.
a. dynamic risks
b. fundamental risks
c. pure risks
d. static risks
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Risk Management
8. State which of the following is false.
a. Company risks are classified as risks inherent to advertising management
b. Company risks are classified as risks inherent to the external context.
c. Company risks are classified as risks inherent to operative management
d. Company risks are classified as risks inherent to financial management
9. Risk management should be able to _________ and be an integral part of the organisational process.
a. contribute
b. supply
c. add value
d. deliver
10. Risk handling is the process that identifies, evaluates, selects, and implements options for _________ risks.
a. aggravating
b. mitigating
c. intensifying
d. emphasizing
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Chapter II
Risk Assessment, Analysis and Evaluation
Aim
The aim of this chapter is to:
•
provide an in-depth view of risk assessment, analysis and evaluation
•
examine steps in risk assessment
•
determine statistical methods used in risk evaluation
Objectives
The objectives of this chapter are to:
•
familiarise with risk categorisation
•
classify different techniques in to risk identification and risk analysis
•
get acquainted with risk estimation
Learning outcome
At the end of this chapter, the students will be able to:
•
prioritise key risks that need to be analysed using risk description table
•
recognise the significance of reporting and communication in risk management
•
enlist PML techniques
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Risk Management
2.1 Introduction
Risk assessment, analysis and evaluation are important components of risk management process. Theses components
need to be studied in detail to apply them effectively in practice.
Risk assessments include detailed quantitative and qualitative understanding of risk, its physical, social, economic
and environmental factors and consequences. It is a necessary first step for any serious consideration of disaster
reduction strategies. Risk assessment encompasses the systematic use of available information to determine the
likelihood of certain events occurring and the magnitude of their possible consequences.
2.2 Risk Assessment
As defined earlier, risks are events or conditions that may occur, and whose occurrence, if it does take place, has a
harmful or negative impact on the achievement of the organisation’s business objectives.
Risk assessment covers the following aspects:
•
Risk Identification and Categorisation – the process of identifying the company’s exposure to uncertainty
classified as Strategic / Business / Operational.
•
Risk Description – the method of systematically capturing and recording the company’s identified risks in a
structured format.
•
Risk Estimation – the process for estimating the cost of likely impact either by quantitative, semi-quantitative
or qualitative approach.
Risk identification is an important step in risk assessment. The other steps are risk description and risk estimation.
2.2.1 Risk Identification and Categorisation
Key characteristics by which risks can be identified are:
•
Risks are adverse consequences of events or changed conditions.
•
Their occurrence may be identified by the happening of trigger events.
• Their occurrence is uncertain and may have different extents of likelihood.
After recognizing the kind of risks that company is/may be exposed to, risks will be classified broadly into the
following categories:
Fig. 2.1 Categorisation of risks
•
The nature of the risk identification phase depends on how risk has been defined. Whatever the definition, a risk
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arises in the presence of values or asset elements that represent a stake for the company or organisation; where
certain qualities must be maintained for the entity to function properly.
•
Identifying potentially critical assets is therefore the first step, and a part of all risk analysis methods.
•
The second step, which depends on how risk has been defined, involves looking for:
‚‚ threats that may damage these assets, and vulnerabilities that could be exploited ( where risk is identified
on a threat/vulnerability basis), or
‚‚ damage that may affect these assets and the circumstances in which this damage may occur (where risk is
identified on a situation/scenario basis)
2.2.2 Risk Description
Risk description helps in understanding the nature and quantum of risk and its likely impact and possible mitigation
measures.
•
Risk descriptions for each of the risks identified in the risk matrix are to be documented and recorded in a
structured format in each area where the risk is identified.
•
The objective of risk description is to display the identified risks in a structured format, for example, by using
a table. The risk description table can be used to facilitate the description and assessment of risks.
•
The use of a well designed structure is necessary to ensure a comprehensive risk identification, description
and assessment process. By considering the consequence and probability of each of the risks set out in the
table, it should be possible to prioritise the key risks that need to be analysed in more detail. Identification
of the risks associated with business activities and decision making may be categorised as strategic, project
tactical, operational. It is important to incorporate risk management at the conceptual stage of projects as well
as throughout the life of a specific project.
Name of risk
Scope of risk
Qualitative description of the events, their size, type, number
and dependencies
Nature of risk
E.g. strategic, operational, financial, knowledge or compliance
Stake holders
Stake holders and their expectations
Quantification of risk
Significance and probability
Loss potential and financial impact of risk
Value at risk
Probability and size of potential losses/ gains
Objectives for control of the risk and desired level of performance
Risk tolerance/Appetite
Risk treatments and control mechanisms
Potential action for improvement
Strategy and policy developments
Primary ways by which the risk is currently managed
Levels of confidence in existing control
Identification of protocols for monitoring and review
Recommendations to reduce risk
Identification of function responsible for developing strategy
and policy
Table 2.1 Risk description
(Source: http://www.theirm.org/publications/documents/Risk_Management_Standard_030820.pdf)
2.2.3 Risk Estimation
Risk estimation can be quantitative, semi-quantitative or qualitative in terms of the probability of occurrence and
the possible consequence.
In this process, the consequences of the risk occurrences have to be quantified to the maximum extent possible,
using quantitative, semi-quantitative or qualitative techniques
Process of risk quantification for the company has to be qualitative, supported by quantitative impact analysis.
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Risk Management
To apply this approach, the chain of adverse consequences, which may occur in case the identified risk materialises,
should be enlisted. For each of the chains of adverse consequences, the cost impact needs to be calculated and
attributed to the particular risk. In such an exercise, actual cost impacts (like claims by contractor, loss of equipment
value, etc) as well as opportunity costs (like loss in realisation of revenue, delay in commission of project etc) must
be captured to arrive at the total cost impact of materialisation of the risk.
Fig. 2.2 Risk Estimation
(Source: http://www.nhpcindia.com/writereaddata/English/PDF/RiskManagementPolicy.pdf)
2.3 Risk Analysis
Risk analysis is the process of systematically identifying and assessing the potential threats and uncertainties that
occur when trying to achieve a certain goal (such as completing a project), and then finding a reasonable strategy
for most efficiently controlling these risks. This technique helps to analyse the related vulnerabilities of a project
to these threats.
Risk analysis also helps to define preventive measures to reduce the probability of these factors from occurring and
identify countermeasures to successfully deal with these constraints when they develop to avert possible negative
effects on the competitiveness of the company.
2.3.1 Risk Identification and Analysis Methods
Examples of risk identification techniques
‚‚ Brainstorming
‚‚ Questionnaires
‚‚ Business studies which look at each business process and describe both the internal processes and external
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factors which can influence those processes
‚‚ Industry benchmarking
‚‚ Scenario analysis
‚‚ Risk assessment workshops
‚‚ Incident investigation
‚‚ Auditing and inspection
‚‚ HAZOP (Hazard & Operability Studies)
Risk analysis methods and techniques
Upside risk
‚‚ Market survey
‚‚ Prospecting
‚‚ Test marketing
‚‚ Research and Development
‚‚ Business impact analysis
Both
‚‚ Dependency modelling
‚‚ SWOT analysis (Strengths, Weaknesses, Opportunities, Threats)
‚‚ Event tree analysis
‚‚ Business continuity planning
‚‚ BPEST (Business, Political, Economic, Social, Technological) analysis
‚‚ Real Option Modelling
‚‚ Decision taking under conditions of risk and uncertainty
‚‚ Statistical inference
‚‚ Measures of central tendency and dispersion
‚‚ PESTLE (Political Economic Social Technical Legal Environmental)
Downside risk
‚‚ Threat analysis
‚‚ Fault tree analysis
‚‚ FMEA (Failure Mode & Effect Analysis)
2.3.2 Risk Profile
The result of the risk analysis process can be used to produce a risk profile which gives a significance rating to
each risk and provides a tool for prioritising risk treatment efforts. This ranks each identified risk so as to give a
view of the relative importance. This process allows the risk to be mapped to the business area affected, describes
the primary control procedures in place and indicates areas where the level of risk control investment might be
increased, decreased or reapportioned. Accountability helps to ensure that ‘ownership’ of the risk is recognised and
the appropriate management resource allocated.
2.4 Risk Evaluation
When the risk analysis process has been completed, it is necessary to compare the estimated risks against risk
criteria which the organisation has established. The risk criteria may include associated costs and benefits, legal
requirements, socio-economic and environmental factors, concerns of stakeholders, etc. Risk evaluation therefore,
is used to make decisions about the significance of risks to the organisation and whether each specific risk should
be accepted or treated.
Risk evaluation deals with estimating probability and impact of individual risks, taking into account any
interdependencies or other factors outside the immediate scope under investigation.
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Risk Management
Probability is the evaluated likelihood of a particular outcome actually happening (including a consideration of the
frequency with which the outcome may arise). For example, major damage to a building is relatively unlikely to
happen, but would have enormous impact on business continuity. Conversely, occasional personal computer system
failure is fairly likely to happen, but would not usually have a major impact on the business
•
Impact is the evaluated effect or result of a particular outcome actually happening.
•
Impact should ideally be considered under the elements of:
‚‚ time
‚‚ quality
‚‚ benefit
‚‚ people/resource
•
Some risks, such as financial risk, can be evaluated in numerical terms.
•
Others, such as adverse publicity, can only be evaluated in subjective ways.
•
There is a need for some framework for categorising risks, for example, high, medium and low.
•
When considering a risk’s probability, another aspect is when the risk might occur.
•
Some risks will be predicted to be further away in time than others and so attention can be focused on the more
immediate ones.
2.5 Risk Reporting and Communication
As mentioned in chapter 1, risk reporting and communication is an essential component of risk management. We
have more look in to reporting and communication in risk management.
2.5.1 Internal Reporting
Different levels within an organisation need different information from the risk management process.
•
The higher management should:
‚‚ know about the most significant risks facing the organisation
‚‚ know the possible effects on shareholder value of deviations to expected performance ranges
‚‚ ensure appropriate levels of awareness throughout the organisation
‚‚ know how the organisation will manage a crisis
‚‚ know the importance of stakeholder confidence in the organisation • know how to manage communications
with the investment community where applicable
‚‚ be assured that the risk management process is working effectively
‚‚ publish a clear risk management policy covering risk management philosophy and responsibilities
•
Business Units should:
‚‚ be aware of risks which fall into their area of responsibility, the possible impacts these may have on other
areas and the consequences other areas may have on them
‚‚ have performance indicators which allow them to monitor the key business and financial activities, progress
towards objectives and identify developments which require intervention (e.g. forecasts and budgets)
‚‚ have systems which communicate variances in budgets and forecasts at appropriate frequency to allow
action to be taken
‚‚ report systematically and promptly to senior management any perceived new risks or failures of existing
control measures
•
Individuals working in an organisation should:
‚‚ understand their accountability for individual risks
‚‚ understand how they can enable continuous improvement of risk
‚‚ management response
‚‚ understand that risk management and risk awareness are a key part of the organisation’s culture
20/JNU OLE
‚‚ report systematically and promptly to senior management any perceived new risks or failures of existing
control measures
2.5.2 External Reporting
A company needs to report to its stakeholders on a regular basis setting out its risk management policies and the
effectiveness in achieving its objectives. Increasingly stakeholders look to organisations to provide evidence of
effective management of the organisation’s non-financial performance in such areas as community affairs, human
rights, employment practices, health and safety and the environment.
•
The formal reporting should address:
‚‚ the control methods – particularly management responsibilities for risk management
‚‚ the processes used to identify risks and how they are addressed by the risk management systems
‚‚ the primary control systems in place to manage significant risks
‚‚ the monitoring and review system in place. Any significant deficiencies uncovered by the system, or in the
system itself, should be reported together with the steps taken to deal with them.
2.6 Risk Management: Statistical Methods
Estimation of ‘Probable Maximum Loss’ (PML) is the first most important aspect for the risk manager. The PML
arrived at could be verified, adjusted based on past data of industry of a similar nature. It could be adjusted based
on past incidences of that particular industry. It can also be adjusted based on projected happening, on the whole.
It should be done very carefully based on both past and projected losses.
2.6.1 PML
•
The loss being estimated is neither accurate nor inaccurate; it is just estimation, a probability and is basically a
probable maximum loss. While estimating the probable maximum loss, study would be made as per the perils
covered.
•
Loss can be arrived on account of each and every peril for the same property, however, the insurance cover is
portfolio based, where some perils are covered under the fire policy, some are excluded. Among those excluded,
some would be covered under the engineering policy and again there would be some exclusion. Thus depending
upon the perils covered by the policy along with the exclusions and the add-on covers obtained, an examination
should be made to arrive at a probable, maximum loss normally called PML.
•
While arriving at the PML, even though more than one peril is covered under any one policy, normal estimation
is done if only one peril is at strike at one point of time. Thus the maximum loss would be that loss, which has
been arrived on account of one peril, which has given the maximum loss.
•
While there are twelve perils normally covered under the standard fire policy, it could be the loss estimated
on account of fire and lightning, an earthquake, storm, flood, RSMD and such set of perils being taken into
consideration.
•
PML is also arrived based on:
‚‚ Simulation
‚‚ Model study
‚‚ Accumulation at a time or that place or an event
‚‚ Maximum
‚‚ In some cases the fault tree analysis is also adopted
Risk management begins much before the actual, real activity at that site. The risk management study continues, so
long as that activity is in operation and further even after the activity ceases to exist. Risk management study thus
is a never-ending study/analysis.
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Risk Management
Summary
•
Risk assessment, analysis and evaluation are important components of risk management process. Theses
components need to be studied in detail to apply them effectively in practice.
•
Risk assessments include detailed quantitative and qualitative understanding of risk, its physical, social, economic
and environmental factors and consequences.
•
Risk assessment covers the following aspects: risk identification and categorisation – the process of identifying
the company’s exposure to uncertainty classified as strategic/business/operational, risk description – the method
of systematically capturing and recording the company’s identified risks in a structured format, risk estimation
– the process for estimating the cost of likely impact either by quantitative, semi-quantitative or qualitative
approach.
•
Risks are adverse consequences of events or changed conditions, their occurrence may be identified by the
happening of trigger events, and their occurrence is uncertain and may have different extents of likelihood.
•
After recognizing the kind of risks that company is/may be exposed to, risks will be classified broadly into the
following categories
•
Risk estimation can be quantitative, semi-quantitative or qualitative in terms of the probability of occurrence
and the possible consequence
•
Risk analysis is the process of systematically identifying and assessing the potential threats and uncertainties
that occur when trying to achieve a certain goal (such as completing a project), and then finding a reasonable
strategy for most efficiently controlling these risks. This technique helps to analyse the related vulnerabilities
of a project to these threats.
•
The result of the risk analysis process can be used to produce a risk profile which gives a significance rating to
each risk and provides a tool for prioritising risk treatment efforts. This ranks each identified risk so as to give
a view of the relative importance.
•
Risk evaluation is concerned with assessing probability and impact of individual risks, taking into account any
interdependencies or other factors outside the immediate scope under investigation.
•
Risk reporting and communication is an essential component of risk management. Different levels within an
organisation need different information from the risk management process.
•
Estimation of PML is the first most important aspect for the risk manager. It should be done very carefully based
on both past and projected losses.
References
•
A Risk Management Standard- Published by AIRMIC, ALARM, IRM: 2002. Available at: <http://www.theirm.
org/publications/documents/Risk_Management_Standard_030820.pdf> Accessed 3rd March 2011
•
Living with Risk. A global review of disaster reduction initiatives. 2004 version. Risk awareness and assessment.
Chapter 2, section 3. Inter-Agency Secretariat of the International Strategy for Disaster Reduction (UN/ISDR).
Available at: < http://www.unisdr.org/eng/about_isdr/bd-lwr-2004-eng.htm> Accessed 3rd March 2011
•
Risk Management Policy NHPC Limited Available at: < http://www.nhpcindia.com/writereaddata/English/PDF/
RiskManagementPolicy.pdf > Accessed 3rd March 2011
•
Risk Management: concepts and methods- white paper –CLUSIF. Available at: http://www.clusif.asso.fr/fr/
production/ouvrages/pdf/CLUSIF-risk-management.pdf> Accessed 3rd March 2011
•
The Risk Management Guide. Available at :< http://www.ruleworks.co.uk/riskguide/risk-evaluation.htm>
Accessed 3rd March 2011
Recommended Reading
•
Probabilistic Risk Analysis: Foundations and Methods [Hardcover]. Tim Bedford, Roger Cooke. Publisher:
Cambridge University Press; 1st ed. (April 30, 2001). 414 pages.
•
Risk Analysis: A Quantitative Guide [Hardcover]. David Vose. Publisher: Wiley; 3rd ed. (May 20, 2008).752
22/JNU OLE
pages.
•
Risk Assessment and Decision Making In Business And Industry: A Practical Guide - 2nd ed. [Hardcover].
Glenn Koller. Publisher: Chapman and Hall/CRC; 2nd ed. (March 30, 2005).352 pages
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Risk Management
Self Assessment
1. Risk assessments include detailed __________ and qualitative understanding of risk.
a. value
b. assessment
c. appraisal
d. quantitative
2. Risk assessment encompasses the __________ use of available information to determine the likelihood of
certain events occurring.
a. unorganised
b. systematic
c. maximum
d. minimum
3.
_________ is the method of systematically capturing and recording the company’s identified risks in a structured
format.
a. Risk identification
b. Risk categorisation
c. Risk classification
d. Risk description
4. State which of the following is false.
a. Risks are foreseen and are well handled.
b. Risks are adverse consequences of events or changed conditions
c. Risk occurrence may be identified by the happening of trigger events
d. Risk occurrence is uncertain and may have different extents of likelihood
5. Risk description helps in understanding the nature and quantum of risk and its likely impact and possible
__________ measures.
a. eliminating
b. improvement
c. mitigation
d. statistical
6. Which of the following is not an example of risk identification technique?
a. Risk assessment workshops
b. HACCP
c. Incident investigation
d. Auditing and inspection
7. What does BPEST analysis stand for?
a. Building, Political, Economic, Social, Technological
b. Business, Political, Electric, Social, Technological
c. Business, Political, Economic, Scientific, Technological
d. Business, Political, Economic, Social, Technological
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8. The result of the risk analysis process can be used to produce a _____________ which gives a significance
rating to each risk and provides a tool for prioritising risk treatment efforts.
a. risk profile
b. risk report
c. risk statement
d. risk announcement
9.
__________should have performance indicators which allow them to monitor the key business and financial
activities.
a. Higher management
b. Individuals
c. Business units
d. Director
10. The ________ arrived at could be verified, adjusted based on past data of industry of a similar nature.
a. LML
b. PML
c. KML
d. LMP
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Risk Management
Chapter III
Hazard Management
Aim
The aim of this chapter is to:
•
highlight an integrated view of hazards
•
explain hazard management
•
get acquainted with risk assessment matrix
Objectives
The objectives of this chapter are to:
•
classify hazards
•
examine the role of hazard identification in hazard management
•
familiarise with aids used in hazard identification
Learning outcome
At the end of this chapter, the students will be able to:
•
enlist types of hazards
•
apply risk assessment matrix after hazard identification
•
monitor and review hazard management process
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3.1 Introduction
An important factor of every safety process is hazard identification and management. This is required by many related
standards and shall be performed for every project. It’s often a challenge to find all possible hazards in advance
but it’s possibly an even bigger challenge to manage all hazards over a wide range of products and projects. It is
therefore necessary to combine the results of several safety assessment activities with field experience of already
existing systems.
The solution to system safety is the management of hazards. Understanding hazard theory and the identification of
hazards is essential to effectively manage hazards. Hazard analysis provides the basic foundation for system safety.
It is performed to identify hazards, their effects and causal factors. It is further used to determine system risk, the
significance of hazards and to establish design measures that will eliminate or mitigate the identified hazards and
their associated risk.
Definition
The International Secretariat for Disaster Reduction (ISDR) defines a hazard as “a potentially damaging physical
event, phenomenon or human activity that may cause the loss of life or injury, property damage, social and economic
disruption or environmental degradation.” Hazards could be, natural (geological, hydro-meteorological and biological)
or induced by human processes (environmental degradation and technological hazards).Hazards can be single,
sequential or combined in their origin and effects. Accordingly, hazard analysis entails the identification, study and
monitoring of a hazard to determine its potential, origin and characteristics.
Hazards at work may include:
•
manual tasks
•
untidy workplaces
•
working at heights
•
faulty or unguarded machinery
•
chemicals
•
noise
•
bullying and violence
•
poor work design (for example, tasks involving repetitive movements)
•
inadequate management systems (for example, no procedures for performing tasks safely or for using personal
protective equipment)
Thus, a careful study of all the operations of the unit in any workplace is necessary. The study could lead to the
design of a set of activities, for normal operations, detailed set of activities for regular maintenance activities and a
highly detailed system for any hazardous repair work. Such a detailed study, normally known as hazards operations
is a most difficult operation. Haz-op and Haz-on that is running, maintaining, repairing, replacing in hazardous
installations is a most skilful and difficult operation.
The plan will be different for each plant, depending upon the hazardous nature of chemicals, liability of a dangerous
situation and the quantum involved. A separate study, plant-wise, unit-wise, section-wise becomes necessary and it
has to be well laid down in all formats, so that each and everyone either working or supervising or monitoring or
managing would be aware of it. Some precautionary instructions may be required to be painted in bold letters all
over the premises so that at any point of time anyone would be in a position to notice them.
3.2 Hazard Management
For all hazards a hazard management process must be undertaken. Establishing the parameters of the process
including the criteria by which hazards will be assessed. Staff and contractors are to follow the hazard management
model to ensure all hazards are identified, assessed, controlled and evaluated for effectiveness. The level of risk is
to be determined through the risk assessment process and recommended control measures implemented.
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Risk Management
Hazards management is the most tedious aspect of risk management. Hazards management could depend on various
factors, it could be hazards of operation, and it could be the design aspects or maintenance aspects. It could be
hazards of operators; or the skill of operation or training for operations.
3.2.1 Types of Hazards
It is important to know the types of hazards that may occur in order to deal with them or manage them efficiently.
Fig. 3.1 Types of hazards
(Source: http://www.ibew702.org/uploads/news/website%20NSC,%20Hazard%20Recognition.pdf)
Other than the hazards mentioned above, their may be hazards which may be called as human hazards such as:
Identification of hazards
•
Fig. 3.2 Human factors
Hazards are required to be identified, assessed and controlled:
‚‚ when planning work processes
‚‚ prior to purchase, hire, lease, commissioning or erection of plant or substances
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‚‚ whenever changes are made to the workplace, system or method of work, plant or substances
‚‚ whenever new information becomes available regarding work processes, plant or substances.
•
Hazard identification is the most important step in the risk management process. A hazard which is not identified
cannot be controlled. Hazard identification must be conducted in close consultation with the people performing
the activity.
•
Some aids that can be used to assist staff to identify hazards in the workplace are(some of the aids are illustrated
in tables below):
‚‚ Hazard Register
‚‚ Pre Purchasing Checklist, Design, Plant and Substances
‚‚ Plant Registration Register
‚‚ Plant Hazard Identification and Risk Assessment
‚‚ Procedure for Workplace Inspection
‚‚ Procedure for Incident Reporting and Investigation
‚‚ Procedure for Purchasing
Date
Hazard
Description
Location
Risk
Level
Risk
control
measures
Control
implementation
date
Person responsible
for control
implementation
Date for
reviews
Table 3.1 Hazard register example
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
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Section 1. Hazards
Unexpected startup, unexpected
overrun/over speed
Mechanical hazards
Radiation
Contact with moving
parts; mass and stability
problems
Low-frequency, radio
frequency radiation;
microwaves

Failure/Display of control system

Accumulation of energy inside machinery
e.g. elastic elements

(springs), liquids or gases
under pressure, the effect
of vacuum
Infrared, visible and UV
radiation

Restoration of energy supply after
Interruption

Crushing hazard

X-rays and gamma rays

External influences on electrical
equipment

Shearing hazard

Lasers

Other external influences (gravity,
wind etc.)

Cutting or severing
hazard

Alpha and beta rays,
electron beams neutrons

Errors in software

Entanglement hazards

Materials and substances
Errors made by operator (human/
machine mismatch)

Drawing in or trapping
hazard

Contact with or inhalation of harmful fluids,
gases, mists, fumes and
dusts

Relating to traveling function
Impact hazard

Fire and explosion

Movement when starting Engine

Stabbing puncture

Biological or microbiological hazards

Movement without driver at driving position

Friction or abrasion
hazard

Ergonomics
Movement without all parts in a
safe position

High pressure

Unhealthy postures or
excessive effort
Excessive speed of pedestriancontrolled machinery



Table 3.2 (a) Hazard identification
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
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Inadequate consideration of hand-arm or
foot-leg anatomy
Electrical hazards
Contact of persons with
live parts (direct contact)
Contact of persons with
parts which have become live under faulty
conditions (indirect
contact)
Approach to live parts
under high voltage
Excessive oscillations when moving 



Neglected use of PPE

Insufficient ability of machinery to
be slowed down, stopped and immobilised

Inadequate lighting

From handling of the machine (lack
of stability)

Electrostatic phenomena

Thermal radiation or
other phenomena such
as projection of molten
particles and chemical effects from short
circuits, overloads

Thermal hazards
Burns, scalds and other
injuries by possible contact with objects or
materials (hot or cold)
Damage to health by hot
or cold working environment

Mental overload and
under load, stress
Human error, human
behaviour


Mechanical hazard and hazardous events
From load falls, collisions, machine
tipping (lack of stability)

Inadequate design, location or identification
of manual controls

Uncontrolled loading-overloadingoverturning moments exceeded

Inadequate design or
location of visual display units

Unexpected/unintended movement
of loads

Due to power source and to the
transmission of power

Vibration

Use of hand held machines

Hazards from engine and the batteries

Whole body vibration

Hazards from transmission of
power between machines

Hazards from coupling and towing

Noise
Hearing Loss or other

physiological disorders
Interference with speech,

acoustic signals
Table 3.3 (b) Hazard identification
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
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Section 2. - Summary of Identified Hazards
1.
2.
3.
Any specific circumstances:
Persons at Risks: (list)
Is the risk? (Tick one)
 Minimal risk exposure
 Adequately controlled. No further action required
 In adequately controlled. Further Action/Investigation Required. Proceed with Risk Assessment
(Section 3)
 Covered by Regulation/Standard/Code Specify:
Section 3. – Risk Assessment (List identified hazards and detail measures taken to address the hazards) This
form is to be expanded electronically or additional information attached where required
Controls to be considered from the following hierarchy of controls
1.
2.
3.
4.
Elimination (is it necessary?)
Substitution
Isolation (restrict access)
Engineering (guarding, redesign)
Identified Hazards
Exposure
5. Administration (training. SOP’s,)
6. Personal Protective Equipment
(gloves, respirator) etc
Risk assessment
Consequences
Likelihood
Risk Rating
Required Controls
Controls
Implemented
Yes
Yes
Yes
Yes
Yes
No
No
No
No
No
Table 3.4 Summary of identified hazards and assessment
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
This is followed by risk implementation plan, consultation etc.
Risk Assessment Matrix
A risk assessment matrix or table is a simple way of ranking different potential projects in terms of their potential
benefit and the likely risks or costs in implementing them. Some projects may be very attractive in terms of the
potential benefits that they offer but have serious implementation difficulties. Others may be low value in impact
terms but be easy to implement tomorrow. Ideally firms will want to choose a balanced portfolio of short- and longterm, low- and high-risk projects. Tables below may be used to risk assessments.
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C
o
n
s
e
q
u
e
n
c
e
Probability
Very Likely
Likely
Unlikely
Highly
Unlikely
Life Threatening
High
High
High
Medium
Detrimental
High
High
Medium
Medium
Harmful
High
Medium
Medium
Low
Negligible
Medium
Medium
Low
Low
Table 3.5 Prioritising Hazards and Risks
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
Life Threatening
Hazard may cause death or total loss of one or more bodily functions (e.g. loss of: or
use an arm, an eye, huge financial loss etc).
Detrimental
Hazard may cause severe injury, illness or permanent partial loss of one or more
bodily functions (e.g. noise induced hearing loss), or serious property damage, loss of
production capability.
Harmful
Hazard may cause a reportable incident i.e. an incident that results in the employee
being unable to undertake their normal duties for 7 days or more, or significant
property damage, high financial loss.
Negligible
Hazard may cause minor injury, illness or property damage, first aid treatment only or
no injury, low financial loss.
Table 3.6 Hazard Consequence Rating Table
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
Very Likely
Exposure to hazard likely to occur frequently.
Likely
Exposure to hazard likely to occur but not frequently.
Unlikely
Exposure to hazard unlikely to occur.
Highly Unlikely
Exposure to hazard so unlikely that it can be assumed that it will not happen.
Table 3.7 Probability Rating Table
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
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Risk Priority
Definitions Of Priority
Suggested Time
Frame
High
Situation critical, stop work immediately or consider cessation of work
process.
Must be fixed today, consider short term and/or long term actions.
Now
Medium
Is very important, must be fixed this week, consider short term and/or
long term actions.
This Week
Low
Is still important but can be dealt with through scheduled maintenance or
similar type programming. However, if solution is quick and easy then fix
it today.
Review and/or manage by routine procedures.
1 - 3 Months
Table 3.8 Risk Priority Table
(Source: http://www.unisa.edu.au/ohsw/procedures/hazard.asp)
Hazard management should be an ongoing and constantly improving process. To ensure the effectiveness in
eliminating or minimising risk, the process must be continuously reviewed and steps taken to implement revised
control measures, where appropriate. It ensures that new hazards and those overlooked in the original exercise are
identified and controlled.
The monitoring and review process involves:
•
Systematically checking existing risk control measures to assess their effectiveness.
•
Collecting data on any new hazards which have arisen.
•
Formulating new control measures.
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Summary
•
Hazards could be natural (geological, hydro-meteorological and biological) or induced by human processes
(environmental degradation and technological hazards).Hazards can be single, sequential or combined in their
origin and effects. Accordingly, Hazard analysis entails the identification, study and monitoring of a hazard to
determine its potential, origin and characteristics.
•
The solution to system safety is the management of hazards. Understanding hazard theory and the identification
of hazards is essential to effectively manage hazards. Hazard analysis provides the basic foundation for system
safety. It is performed to identify hazards, their effects and causal factors. It is further used to determine system
risk, the significance of hazards and to establish design measures that will eliminate or mitigate the identified
hazards and their associated risk.
•
Hazards management is the most tedious aspect of risk management. Hazards management could depend on
various factors, it could be hazards of operation, and it could be the design aspects or maintenance aspects. It
could be hazards of operators; or the skill of operation or training for operations.
•
Hazard identification is the most important step in the risk management process. A hazard which is not identified
cannot be controlled. Hazard identification must be conducted in close consultation with the people performing
the activity. Some aids that can be used to assist staff to identify hazards in the workplace are illustrated as
tables.
•
A risk assessment matrix or table is a simple way of ranking different potential projects in terms of their potential
benefit and the likely risks or costs in implementing them. Some projects may be very attractive in terms of the
potential benefits that they offer but have serious implementation difficulties.
•
Hazard management should be an ongoing and constantly improving process. To ensure the effectiveness in
eliminating or minimising risk, the process must be continuously reviewed and steps taken to implement revised
control measures, where appropriate. It ensures that new hazards and those overlooked in the original exercise
are identified and controlled.
References
•
Gabriele Schedl, Hazard Management in Practice. Available at: < http://www.qitweb.com/Safety/SMS_Hazard_
Management.htm> Accessed 3rd March 2011.
•
Hazard Management. Available at: <http://www.unisa.edu.au/ohsw/procedures/hazard.asp> Accessed 3rd March
2011.
•
Hazard Management: play it safe. Available at: < http://www.justice.tas.gov.au/__data/assets/pdf_file/0013/102091/
GB081.pdf> Accessed 3rd March 2011.
•
Hazard, risk and vulnerability. Unit 1. IGNOU. available at: <http://egyankosh.ac.in/bitstream/123456789/3140/4/
Unit%2001.pdf> Accessed 3rd March 2011.
•
Joe Tidd, John Bessant, Keith Pavitt. Managing innovation. Available at: < http://www.managing-innovation.
com/tools/Risk%20Assessment%20Matrix.pdf> Accessed 4th March 2011
Recommended Reading
•
Guidelines for Process Hazards Analysis (PHA, HAZOP), Hazards Identification, and Risk Analysis [Paperback].
Nigel Hyatt. Publisher: CRC Press (March 3, 2003).474 pages.
•
Healthy Living Spaces: Top 10 Hazards Affecting Your Health [Paperback].Daniel P Stih. Publisher: Healthy
Living Spaces; 1st ed. (January 1, 2010).138 pages.
•
Introduction to International Disaster Management, Second Edition [Hardcover].Damon P. Coppola. Publisher:
Butterworth-Heinemann; 2nd ed (March 9, 2011).696 pages
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Self Assessment
1. It is necessary to combine the results of several safety assessment activities with ___________ of already
existing systems.
a. tables
b. figures
c. field experience
d. equations
2. Hazard analysis provides the basic foundation for ________________.
a. analysis
b. system safety
c. hazards management
d. recovery
3. Hazards could be natural or ____________by human processes.
a. artificial
b. enhanced
c. improved
d. induced
4. Which is the most tedious part of risk management?
a. Hazard management
b. Risk Assessment
c. Hazard Assessment
d. Risk matrix
5. ‘Repetition’ is which type of hazard?
a. Electrical
b. Biological
c. Ergonomic
d. Chemical
6. Which of the following is not an human error which may induce hazard?
a. Incorrect training
b. Floor texture
c. Over qualification
d. Poor judgement
7. State which of the following is true.
a. Hazards are required to be identified, assigned and controlled when planning work processes
b. Hazards are required to be identified, assessed and evaluated when planning work processes
c. Hazards are required to be identified, assessed and controlled when executing work processes
d. Hazards are required to be identified, assessed and controlled when planning work processes
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8. A risk assessment matrix or table is a simple way of __________ different potential projects in terms of their
potential benefit and the likely risks or costs in implementing them
a. ranking
b. highlighting
c. eliminating
d. improving
9. A hazard which is not identified cannot be ___________
a. assessed
b. monitored
c. controlled
d. improved
10. The monitoring and review process involves __________ new control measures.
a. adding
b. formulating
c. subtracting
d. improving
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Chapter IV
Risk Management Aspects
Aim
The aim of this chapter is to:
•
explore other aspects of risk management
•
provide a perspective of risk management legislation
•
highlight the role of risk managers
Objectives
The objectives of this chapter are to:
•
familiarise students with estate management, disaster management
•
view strategies and techniques employed by risk managers
•
explain risk mitigation
Learning outcome
At the end of this chapter, the students will be able to:
•
discuss the features of factory act
•
explain the process conducted by IRDA
•
apply chess method in practice
•
recall risk contingency planning features
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4.1 Introduction
The process of risk management is not only restricted to controlling the threats or reducing their negative effects. It
is a much deeper concept that also involves risk avoiding as well as risk taking. Every work involves some or other
kinds of risk. Sometimes we can avoid, sometimes we can control the phenomenon and sometimes you simply let
it come. Same is true for the business world.
Only designing and implementing a risk management plan is not enough to treat risk. It depends on organisation
to organisation and industry-to-industry. There are various other criteria that need to be analysed such as internal
and external environment of a company, company’s ability to develop and implement a risk management plan
effectively.
In-depth examination of the organisation’s requirements and the need to treat the risk is required. Sometimes,
avoiding risk is considered as the best strategy.
When we decide about a risk management plan, we need to examine thoroughly and ask ourselves some questions
before proceeding further. These questions act as an eye opener and provide us with the outline of what we need
to do and what to look at.
•
Is a plan actually required: This is first and the foremost question that we need to ask ourselves. Thoroughly
examine the situation and decide if we actually need a risk management plan.
•
Is the plan feasible: This is really important to checkout if the prepared risk management plan is feasible or if
it is possible to bring it to life. Also check if it suits the requirements or not.
•
Strengths and weaknesses of a risk management Plan: Conduct a SWOT analysis and try to find out the strengths
and flaws in the plan. Remove the flaw before hand so that you get desired results after implementing it.
•
Does it meet the objectives: The biggest requirement for a risk management plan to be successful is that it should
meet the company’s objectives Try to match the firm’s objectives with plan’s objectives.
•
Analyse if risk needs to be treated: Carefully examine if you can avoid the risk or not. There is no need to
develop a full-fledged plan if you think you can avoid it. It is not at all necessary to treat the risk always. It
depends on the severity of a situation.
•
Plan backed by clearly defined activities and events: A risk management plan should always be backed by clearly
defined activities and events otherwise it may cause problems in long run.
Fig. 4.1 Risk management examination
4.2 Aspects of Risk Management
Risk management is utilised in various types of situations. With a few practical changes, a risk management plan
can be developed, which will help in any given situation. Some of these situations are explained in the chapter.
4.2.1 Estate Management
•
It means keeping the estate the way it has been designed ready for use at all times. That means no misuse should
be allowed, if a place has been ear-marked for resting, it should remain a place of resting and not become a
godown or a scrap yard. If a path has been ear-marked for emergency exit, it should at all times remain an
emergency exit, irrespective of changes in the working of the factory. The passage should remain clear and it
should not be used as a temporary storage area.
•
Thus, keeping the estate in a ‘state of design’ ready for use at all times is the most important aspect of risk
management. Proper housekeeping becomes necessary on a day-to-day basis. If the floor is not cleaned well by
evening it may be unsafe for the worker to operate at the same place on the next day, especially where grease,
oil are used extensively for quenching, cooling, drilling, running the machine.
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•
It becomes most essential, further if it is a metal factory, where turning, knurling milling, etc. has been done.
The scrap, sharp enough to puncture the body, would be all around the floor.
•
As such effective housekeeping becomes necessary. Housekeeping also includes proper ventilation and light
and easy movement for all the people working around.
4.2.2 Disaster Management
•
Each organisation must have a disaster plan to adopt, in case they have to meet an accidental situation. They
must adopt a disaster management system, which should be practised. It is not just drawing the management
policy on a piece of paper to face a disaster, but it should be used in practice.
•
People must be aware of the paths available for emergency exits and that would be possible only when regular
emergency drills are carried out. They should at any point of time, be in a position to know the path they should
follow. Normally when any incident takes place, or an accident happens, people lose their common sense. The
common sense becomes so uncommon sense that they move in an insensible manner. To ensure that even in such
situations, they do not become nervous, they are alert, they are sensible, it is necessary for the Risk Manager to
ensure that all the working people have gone through adequate practice sessions.
•
Basically all these aspects are based on the ethical, moral and social commitments of the management/the
proprietor/the owner. If the owner, if the proprietor, if the management are committed to high standards, then
it will ensure that each one falls in line.
•
If the management is not that keen in having either standards or sticking to those standards, then it will be very
difficult, down the line, for people to adhere to such practices.
•
With the use of technology to have an effective control system, it becomes necessary to have a safe working
atmosphere, which is the prime duty of a risk manager.
4.2.3 Financial Risk Management
Financial risks are losses due to financial market activities. Examples of financial risk include losses due to interestrate movements or defaults on financial obligations. Financial risks are easy to handle in the respect that the losses are
usually well defined with money as the obvious performance measure, which makes risks commensurable and easy
to valuate. The performance measure is in general modelled as a one-dimensional real-valued stochastic variable X.
The risk analysis methods are based on finding a good estimate of its probability distribution in one way or another
and identifying which factors influence the distribution and how. Widely used risk measures include distribution
characteristics, such as the standard deviation (or volatility) and low-end quantiles i.e. Value at Risk and other “worst
case” measures. Another group of risk measures is the sensitivity measures, also called “the Greeks” (because they
are denoted using the Greek alphabet) They are partial derivatives of the portfolio value in respect to some market
parameter (e.g. stock market index, prize of underlying asset, volatility, interest rate, time). The probabilities are
estimated using e.g. historical data, time series or Monte Carlo simulations.
4.2.4 Process Industry
In process industry, risk management has traditionally focused on considering the probability of specific events or
accidents. Analysts may be interested e.g. in the probability of the overheating of a nuclear reactor or fire detection
system dysfunction. The severities of different undesired events are not necessarily compared. In the most important
field of application, the nuclear power industry, probabilistic safety assessments (PSA) have been conducted since
the 1970’s. The PSA is a comprehensive, structured approach to identifying failure scenarios and constituting a
conceptual and mathematical tool for deriving numerical estimates of risk.
The systems in process industry are usually well defined, enabling the development of sophisticated analysis tools.
There are several methods for identifying critical events or chains of events, e.g. failure mode and effect analysis
(FMEA), Hazard and Operability study (HazOp) and reaction matrix, to mention only a few (Andrews and Moss,
2002). Methods for assessing the probability of an event and the effect of potential actions include fault tree and
event tree analysis. Also several component importance measures can be useful in trying to improve the reliability
of a system
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4.2.5 Insurance
Insurance is an old way of securing oneself against risk and is based on sharing the total losses among a large number
of policyholders. In this way everyone pays a share of the losses and no one has to suffer unbearable loss. The
philosophy assumes that the losses can be compensated with money. Although this assumption often is justified, it
may be argued whether money can cover the damage of death or physical injuries. The prising of insurances is based
on the average damage compensations, risk margins, administration costs and contribution margins. The insurance
brokers do risk studies to find out the risk profile of the customers in order to be able to offer right insurances.
Accident probabilities are estimated using statistical information.
4.2.6 Society and Foresight
Risks threatening the society in the future are often characterised by high incertitude and in definability. Sometimes
we just do not know what we do not know. Because of the unpredictability of the problem, often no sophisticated
scientific analyses are possible. Thus, the studies must rely on different future scenarios and expert opinions, which
in general are nothing more than good guesses or pure speculations. The risks can be tackled by conducting scenario
analyses and practising the precautionary principle.
4.2.7 Environment and Health
Environmental and health risks include spreading diseases, environmental impacts of human activities and changes
in the ecosystem. Due to the characteristics of the risks, usually the whole population of a region is exposed and
thus, the risk management is handled by governments and supported by civic organisations. The analysis tools are
based on attempts to model the causal relationships of the phenomena. Examples of these are models for spreading
of diseases, and different population and bio system models.
4.3 Laws and Acts
An in-depth knowledge about laws and acts regarding risk, hazards, and its management is always helpful. We will
have an overview of some such laws and acts.
4.3.1 Factory Act
•
Some aspects of risk management are based on the provisions of the Factory act. The Indian Factory Act 1948
outlines what should be called a factory, a small scale industry, medium level factory, non-hazardous factory
and hazardous factory, highly hazardous factory, depending upon the quantum of power, the capacity of energy,
the number of people working therein or the extent of the plant, etc.
•
Further it lays down certain conditions during working hours that greater emphasis should be placed on having
a safe working environment, which calls for adequate housekeeping like ventilation, rest room, first aid, etc.
•
Depending upon the category, some of the workers should be covered under employees state insurance corporation
schemes and ensure that, they are adequately compensated, in case they meet with any injury, accident.
•
Each factory is subject to periodical inspection.
•
Each state has its own guidelines and depending upon the type of factory, they are inspected on a monthly,
quarterly, half yearly and yearly basis. These are also inspected at the installation stage/accident stage.
•
The factory inspector basically looks into safety aspects, which had been designed and provided at the beginning
and whether they are maintained. The inspector also inspects the premises whenever an accident takes place.
Man hours are lost, production stopped, to check whether any failure in the safety aspect has resulted in such
an incident.
•
The factory act emphasises on the working conditions and the working atmosphere. Some factories cannot start
functioning unless they obtain certification from the factory inspector, as in a municipal corporation area a house
cannot be occupied unless an occupation certificate is issued.
•
Similarly factories cannot start functioning, without complying with the provisions of the factory act. The act
insists on the quantum and the system of safety controls to be provided for starting factories and later on be
inspected, on a yearly basis to ensure it. They are not concerned with accidental losses that may take place.
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Risk Management
4.3.2 The Workmen’s’ Compensation Act
The Workmen’s’ Compensation Act also plays a great role in directing the owner to have an insurance cover, which
covers all the workers in any eventualities.
4.3.3 Bio-Hazards
•
In response to concerns about environmental introductions of Genetically Modified Organisms (GMOs), the
countries world over have outlined policies and regulations for overseeing safety and environmental use of the
products at every stage of the development of biotechnology products or services. For example at the research
stage, control exists to help ensure the safety and well being of laboratory workers including controls on the
manipulation and release of genetically engineered organisms.
•
Legislation covers good lab and manufacturing practices and animal experimentation. At the production stage
thee are important laws on the health and safety pf technical staff and other workers are important laws on the
health and safety of technical staff and other workers as well as on product testing and analysis.
•
There are important laws which govern all bio technological processes which may cause emissions of harmful
organisms. These laws are widely applied to all industrial processes, but are of particular importance to those
using new technologies (e.g. based on rDNA). These regulations are under continuous review and modifications
in light of new experiences. The regulations aim at striking balance and minimizing risks to public health and
the environment. The guidelines employ the concept o physical and biological containment and also upon the
principle of good laboratory practice.
4.3.4 Standard Fire Policy
•
Normal cover: fire, lightning, explosion, aircraft damage, riot, strike, malicious damage, terrorism damage,
storm, tempest, flood, inundation.
•
Additional cover: impact damage, subsidence, landslide, bushfire, bursting, missile testing operations, forest
fire, spontaneous combustion, earthquake.
•
General exclusion: war group perils, nuclear perils, and many others with limited applications.
4.3.5 Insurance Regulating Development Authority (IRDA) Policies and Measures
•
When an unwanted incident takes place and leads to some losses like injury death, etc. the quantum of loss so
incurred would be estimated by the risk manager of the company only when, it is in the bear category or share
category, that is they are not insured and insurance companies have nothing to do with it.
•
The insurance companies by accepting the risk, agree for the transfer of the burden at a price, which would be
done only after a thorough inspection by risk managers, risk engineers, risk evaluators or risk officers.
•
However, when the incident has taken place and loss has occurred, they would need the services of an entirely
different category, for the assessment of the loss. Based on their assessment, payment will be made to the insured.
This particular category is known as the ‘surveyor’. In all portfolios of insurance except for marine they are
called surveyors and in marine they are called adjusters.
•
The IRDA has a system of registration of surveyors and adjusters. Normally the engineers, chartered accountants,
cost accountants and retired, resigned, professionals from the General Insurance and Life Insurance Corporation
are registered as surveyors and depending upon their depth of experience, they are classified in the A, B, C
category.
•
IRDA also prescribes passing the examination at an associate level and licentiate level of the Indian Institute of
Insurance for being appointed a surveyor. Based on the variety of claim assessment, the surveyors are registered
in the appropriate category. Thus, the surveyor is the principal person for assessing losses to enable insurance
companies to indemnify the insured, according to policy terms and conditions.
•
As such whenever an incident takes place and losses occur, a basic intimation by the insured to the insurer, the
insurance company, must be provided. Depending upon the quantum of loss indicated therein, in the claim form,
an appropriate surveyor is appointed.
•
Sometimes the surveyor could be a pilot surveyor making a rough estimate of cost and later on he could be again
42/JNU OLE
put in charge for making a final assessment. In some cases they may appoint two surveyors as joint surveyors
for assessment of claim. In exceptional cases the re-insurance company may send their own surveyor to make
a proper assessment of loss.
•
Thus, the surveyor is the most important professional in the field of insurance.
‚‚ Whether the loss has occurred. Whether the materials damaged have been insured.
‚‚ Whether such losses have been caused by the perils, which are included in the policy of the insurance
company.
‚‚ Whether the policy is in force. As such he would be going through the entire ambit of the perils, included
perils, excluded and add-on perils included and the terms and conditions very carefully, and then starts
assessing the loss item by item, section by section, unit by unit.
•
Then he also undertakes an exercise to check, whether there is any under insurance and if it is there he applies
the factors for reducing the quantum of payable loss.
•
The most important intellectual exercise of a surveyor is to arrive at the value of the material at the time of
loss. So he has to take into consideration all the aspects of wear and tear and depreciation. He will verify all
the documents since the beginning of purchase of the material to arrive at the reasonable/realistic value. In
some cases it may also happen that prices of certain items have appreciated very much in the market. As such
the surveyor will have to a market to find out the realistic value of the damaged assets. Normally chartered
accountants or cost accountants, who are very good in accounting systems, would be in a better position to
arrive at the realistic value.
•
Insurance corporations have a moral binding on the insured. They are required to indemnify the insured and place
him in the same position, he was prior to the incidents, after the incident has taken place and the loss has been
incurred. The insured cannot make any profit, on account of the insurance cover. Further insurance companies
also cannot incur any loss on account of the cover, or protection, or insurance, they have provided.
•
The premium received by them, as the cost of burden transfer, from the insured to the insurer, is based on the
value of the assets, the tariff for that category of the risk; therefore they would not be in a position to make any
payment beyond the prescribed limits.
•
Thus, surveyors play a vital role in assessing the quantum of loss, taking into consideration all aspects and
making adjustments for all the accounts. Further in some cases they may have to also undertake responsibility
for disposing the scrap, the salvaged material to arrive at a reasonable value of the claims, or the standard to
arrive at a reasonable value of the salvage, if the insured has the desire to retain such items.
•
The claim amount payable will have to be brought down accordingly and in case the insured has declaimed to
have such interest, the insurer would like to ensure that such salvage is disposed off on account to show the
amount so realised would be the realistic figure for his client and to settle the claim.
•
Thus, the surveyors will have to make an extensive study of all the requirements. In the case of engineering or
fire or motor or aviation, it could be a bit easy comparatively to assess the quantum of loss, however in the case
of marine cargo, marine hull, it becomes a little bit more difficult, the cargo which is in transit, in voyage, may
vanish on account of many natural factors of nature and also on account of its own characteristics.
•
Thus, an adjustment in the quantity becomes necessary. For some items the quantity is reduced and for some
items the quantity is increased, so the adjuster will have to understand very carefully the category and the
characteristics of such items to apply the proper adjustment factor.
•
Further, when the ship is in transit it may be forced to take a deviation, which leads to a prolonged duration
of journey in the sea, which would cause additional factors to come into action, which may result in further
reduction of the quantity, spoilage of the material or damage to the items.
•
There would be some cases where forced by weather conditions, with the sole aim of surviving, the ship may
have to sacrifice, to bring down the quantum of cargo in the ship, so that it is capable of moving further and
reach its destination. Sacrifice would normally be of the material, which is on the top and can be easily removed
from the ship and thrown into the sea, the entire cargo is taken into account while considering the percentage
reduction for the value of the cargo which has been sacrificed. Adjusters play an additional role while evaluating
the quantum of loss. Surveyors further play a most important role in risk management.
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Risk Management
•
Surveyors have had much experience in assessing the losses on account of various perils acting in various
circumstances and situations, at various places, in various organisations. They have analysed thread-bare many,
many such incidents. They are not bound by company jurisdiction, neither by policy jurisdiction. Today he may
be evaluating a loss for one company under an engineering policy and tomorrow he may evaluate a loss for
another company under the fire policy.
•
Sometimes he may evaluate a loss, for another company under the consequential loss policy. As such some
well-experienced surveyors have wide knowledge of the insurance field and such knowledge could be used as
an ‘alert system’ in bringing improvements in other places.
•
The alert system basically started with aviation. Most of the Boeing companies, which give aircraft on hire to
all the operating companies, have the alert system. Each part is designed for a particular period of service.
•
Suppose a wheel designed for hundred hours of flying, fails within sixty hours of flying and the risk managers
of the manufacturing companies find that the defect is on account of the design itself, they flash an alert system
and change all such wheels in all the aircraft which have over sixty hours of running.
•
Thus, they take adequate extra precautionary steps in averting any further incidents in their aircraft as an aircraft
is the costliest vehicle. If surveyors find very clearly, some trends causing the occurrence of either electrical
fire or machinery breakdown or stoppage of a chain action or explosions of gases or some such causes, which
are very particular, they can advise the entire insured community of their findings. Suppose a German made
machine, working at high speed fails while performing and the surveyor has assessed that such failure is mainly
on account of high speed, he may advise the insurance companies/organisations to ensure that such German
made machines used for such purpose, should not run beyond that prescribed limit of speed.
•
Accordingly insurance companies can advise all the insured, to ensure that such type of machines do not run
beyond the specified speed, thereby they would be in a position to avert any possible incidences in such machines
because of high speed. Thus, surveyors are real knowledge banks. They are required not only for assessing the
quantum of loss, which is their prime duty, but also to help in risk management studies, so that loss reduction
and loss aversion could be achieved to a greater extent.
4.4 Role of Risk Managers
•
It is the risk manager’s duty to ensure that economical, practical and practicable suggestions are made for the
better working of the organisations. If the cost of implementation is too high, the management may not adopt
the measures as overall costing of their product would depend upon the price prevailing in the market and sales
could be affected.
•
The main concern is to ensure that they have a product, which would be sold in the market at a competitive
price and still earn some profit.
•
The risk manager must keep this in mind while making suggestions. The risk manager will have to ensure that
the suggestions made by him for the improvement of working conditions for a safer and proper environment,
should be economical, cheaper, practical or practicable and at the same time these should also ensure that in
case of accidents, losses are reduced.
•
The technique of the risk manager is very unique. Based on global experience some methods are being designed,
which have been tuned further, when it comes to the national level and further fine tuned, when it comes to local
level and even each unit will have to be treated separately. Though the machine is the same, the worker is not
the same, the working method is not the same, and the extent of training of the worker and his experience/skill
become major factors of difference.
4.4.1 Strategies Adopted by Risk Managers
The necessity for risk management is learnt through practice. Basically risk management ensures that each and
everyone is always ready to face any eventuality. Some expert risk managers have given ten commandments for
risk managers. These are as follows:
•
Align Strategy: Align risk projects with corporate strategy and objectives.
•
Align Capabilities: Align risk projects with internal capabilities. Obtaining sponsorship from senior management
and concerned departments is a must.
44/JNU OLE
•
Obtain sponsorship: Obtaining sponsorship from senior management is essential for efficient functioning of
a risk management plan
•
Go for Tangible Benefits: Go global first with the parts that get you the biggest bang.
•
Design Windows not Black Boxes: Users must see and understand what the risk calculates to.
•
Open Analysis and Results: The risk manager can confirm that the management are getting the risks right by
keeping models open.
•
Create Club Compatible Models: Separating model engines does not reduce processing efficiency.
•
Plan for Iterations: It should be prepared for adjustments to the designed process.
•
Data: Data is the only way to identify and fix the problem.
•
Global Team: The members of the team are of much higher standard than the local process.
Fig. 4.2 Strategies for risk managers
4.4.2 Techniques Adopted by Risk Managers
•
Chess
‚‚ Insurance is not complete protection. Insurance is against insurable perils, insurance is against insurable
properties and insurance will be limited to the agreed value in case of life, as it cannot be estimated. Thus,
insurance cover does not give hundred percent protections to anyone. Therefore the risk manager will have
to identify such areas where insurance protection is not available and still ensure that adequate protection
is ensured. Insurance further doesn’t give any protection for the loss of skill. Therefore the risk manager
will have to adopt a method wherein a standby skill is made available to the management, whenever the
skill is lost on account of any accident.
‚‚ Many risk managers adopt the eight by eight system for the evaluation of risk. It is like playing chess. Sixtyfour houses, sixteen white and sixteen black pawns and two players. Chess calls for a high-level intellectual
attitudinal quality for making play most interesting. Similarly, the evaluation of any risk by a risk manager
using the eight by eight method is the most appropriate.
‚‚ Depending upon the nature of activities, basic eight parameters for evaluating the risk can be drawn. Further,
on inspection of each of the aspects, a parameter could be evaluated at the worst as one and best as eight.
Thus, the total marks obtainable by the worst evaluated risk would be eight and the highest marks obtainable
by the best risk could be sixty-four.
‚‚ Taking the centre thirty-two as the cut off line, as a risk between thirty-two to sixty-four could be thought
of as a good risk and their grading could be made between thirty-two to sixty-four.
‚‚ Based on such evaluation, even the cost for transfer of the risk could be worked out. If an insurance company
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Risk Management
finalises a basic rate to accept a note, which stands at the grade of thirty-two, it could be discounted between
thirty-two and sixty four at either half percent or one percent or two percent per point.
‚‚ Similarly for accepting the risk, which is between eight and thirty-two, it could be loaded in the same fashion
at either half percent or one percent. Suppose we adopt per point increase or decrease of the basic rate by
one percent for the best risk, which is at sixty-four, it will be thirty-two percent less and for the worst risk
it could be 24 % more.
‚‚ In this all the aspects, good aspects and bad aspects are taken into consideration only on detailed, extensive,
evaluating inspection by a well-experienced risk manager.
• Eight by Eight
Most foreign companies adopt the method of eight by eight on a ranking basis, which helps them for standard rating,
for loading of rating, for discounting of rating, for rewarding rating and punitive rating.
The risk manager also takes care of risk mitigation.
4.5 Risk Mitigation
Risk mitigation involves two steps:
‚‚ Identifying the various activities, or steps, to reduce the probability and/or impact of an adverse risk.
‚‚ Creation of a Contingency Plan to deal with the risk should it occur.
Taking early steps to reduce the probability of an adverse risk occurring may be more effective and less costly than
repairing the damage after a risk has occurred. However, some risk mitigation options may simply be too costly
in time or money to consider. Mitigation activities should be documented in the Risk Register, and reviewed on a
regular basis. They include:
‚‚ Identification of potential failure points for each risk mitigation solution.
‚‚ For each failure point, document the event that would raise a “flag” indicating that the event or factor has
occurred or reached a critical condition.
‚‚ For each failure point, provide alternatives for correcting the failure
4.5.1 Risk Contingency Planning
Contingency planning is the act of preparing a plan, or a series of activities, should an adverse risk occur. Having
a contingency plan in place forces the project team to think in advance as to a course of action if a risk event takes
place.
‚‚ Identify the contingency plan tasks (or steps) that can be performed to implement the mitigation strategy.
‚‚ Identify the necessary resources such as money, equipment and labor.
‚‚ Develop a contingency plan schedule. Since the date the plan will be implemented is unknown, this schedule
will be in the format of day 1, day 2, day 3, etc., rather than containing specific start and end dates.
‚‚ Define emergency notification and escalation procedures, if appropriate.
‚‚ Develop contingency plan training materials, if appropriate.
‚‚ Review and update contingency plans if necessary.
‚‚ Publish the plan(s) and distribute the plan(s) to management and those directly involved in executing the
plan(s).
Contingency plan may also be reflected in the project budget, as a line item to cover unexpected expenses. The
amount to budget for contingency may be limited to just the high probability risks. This is normally determined by
estimating the cost if a risk occurs, and multiplying it by the probability. For example, assume a risk is estimated to
result in an additional cost of $50,000, and the probability of occurring is 80%. The amount that should be included
in the budget for this one item is $40,000. Associated with a contingency plan, are start triggers and stop triggers.
A start trigger is an event that would activate the contingency plan, while a stop trigger is the criteria to resume
normal operations. Both should be identified in the Risk Register
Risk management is a continuous process. If you have not updated your risk register for a while, then
there are likely to be new risks that you have not covered.
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Summary
•
Only designing and implementing a risk management plan is not enough to treat risk. It depends on organisation
to organisation and industry-to-industry. There are various other criteria that need to be analysed such as internal
and external environment of a company, company’s ability to develop and implement a risk management plan
effectively.
•
In-depth examination of the organisation’s requirements and need to treat the risk is required. Sometimes,
avoiding risk is considered as the best strategy.
•
Risk management is utilised in various types of situations. With a few practical changes, a risk management
plan can be developed, which will help in any given situation. Some of these situations are explained in the
chapter.
•
Estate management means keeping the estate the way it has been designed ready for use at all times. That means
no misuse should be allowed, if a place has been ear-marked for resting, it should remain a place of resting and
not become a godown or a scrap yard.
•
The factory act emphasises on the working conditions and the working atmosphere. Some factories cannot start
functioning unless they obtain certification from the factory inspector, as in a municipal corporation area a house
cannot be occupied unless an occupation certificate is issued.
•
The Workmen’s’ Compensation Act also plays a great role in directing the owner to have an insurance cover,
which covers all the workers in any eventualities.
•
There are important laws which govern all bio technological processes which may cause emissions of harmful
organisms. These laws are widely applied to all industrial processes, but are of particular importance to those
using new technologies (e.g. based on rDNA). These regulations are under continuous review and modifications
in light of new experiences. The regulations aim at striking balance and minimizing risks to public health and
the environment. The guidelines employ the concept o physical and biological containment and also upon the
principle of good laboratory practice.
•
It is the risk manager’s duty to ensure that economical, practical and practicable suggestions are made for the
better working of the organisations. If the cost of implementation is too high, the management may not adopt
the measures as overall costing of their product would depend upon the price prevailing in the market and sales
could be affected.
References
•
Risk Management Plan Available at: <http://interop.mt.gov/content/docs/IM_Risk_Management_Plan_v4_0.
pdf > Accessed 8th March 2011
•
TIFAC. Available at: <http://www.tifac.org.in/index.php?option=com_content&view=article&id=695&Itemid
=205 > Accessed 8th March 2011
•
Various aspects of risk management. Available at:< http://www.managementstudyguide.com/risk-managementaspects.htm> Accessed 8th March 2011
•
James T. Gleason. Risk: The New Management Imperative in Finance pp 243-245.
•
Markus Porthin Advanced Case Studies in Risk Management. Available at: < http://citeseerx.ist.psu.edu/>
Accessed 9th March 2011
Recommended Reading
•
At Risk: Natural Hazards, People’s Vulnerability and Disasters [Paperback]. Piers Blaikie, Terry Cannon, Ian
Davis, Ben Wisner. Publisher: Routledge; 2nd ed. (December 19, 2003).496 pages.
•
Fundamentals of Enterprise Risk Management: How Top Companies Assess Risk, Manage Exposure, and Seize
Opportunity [Hardcover]. John J. Hampton. Publisher: AMACOM (August 5, 2009).308 pages.
•
Natural Hazards Analysis: Reducing the Impact of Disasters [Hardcover]. John Pine. Publisher: Auerbach
Publications; 1 ed (October 22, 2008).304 pages.
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Risk Management
Self Assessment
1. Sometimes we can avoid, sometimes we can ___________ the phenomenon and sometimes you simply let
risks come.
a. understand
b. analyse
c. control
d. utilise
2. The need to treat the risk depends on the ___________ of a situation.
a. value
b. severity
c. need
d. requirement
3. The biggest requirement for a risk management plan to be ______ is that it should meet the company’s
objectives.
a. useful
b. complete
c. implemented
d. successful
4. State which of the following is false
a. Align risk projects with personal strategy and objectives.
b. Align risk projects with internal capabilities.
c. Obtaining sponsorship from senior management and concerned departments is a must.
d. Go global first with the parts that get you the biggest bang
5. Housekeeping also includes proper __________ and light and easy movement for all the people working
around
a. passage
b. gates
c. ventilation
d. windows
6. The factory act emphasises on the ___________ and the working atmosphere.
a. workers
b. working conditions
c. bonuses
d. pay scale
7. The eight by eight technique similar to_______________.
a. Crossword
b. Scrabble
c. Carom
d. Chess
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8. Mitigation activities should be documented in the ___________
a. file
b. document
c. book
d. risk register.
9. State which of the following is false
a. Identification of potential failure points for each risk mitigation solution.
b. For each failure point, document the event that would raise a “flag” indicating that the event or factor has
occurred or reached a critical condition.
c. Identification of potential success points for each risk mitigation solution.
d. For each failure point, provide alternatives for correcting the failure
10. __________ may be reflected in the project budget, as a line item to cover unexpected expenses.
a. Risk plan
b. Contingency plan
c. Risk budget
d. Mitigation plan
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Risk Management
Annexure I
Engineering Risk Management
According to a practicing engineer of a public sector insurance company, the development of engineering risk
management was:
•
out of a voluntary move by the Manchester steam user’s association in the middle of last century to introduce
independent inspection and certification services for boilers in the interest of both safety and efficient use
•
whilst statutory inspections
Potential loss area in industrial activity
•
use of investment capital
•
conceptual and detail design
•
manufacture, construction, installation, commissioning
•
breakdown/failures of machinery, plant, installations
•
delays in meeting targets
•
influences on earnings and profits
•
damage to reputation
•
fire and explosion
•
natural perils
•
various liability exposures
•
health and safety of workforce/general public
Potential loss area (non-technical areas)
•
accounting system
•
industrial relations
•
human factors
•
industrial espionage
•
investment policy
Civil works
This area presents more danger to the workforce
The problem areas are:
•
scaffolding
•
excavations
•
demolition
• piling foundations
The quality of all these depends on three ‘C’s
•
cement
•
compaction
•
curing
Erection or installation
•
those arising from extraneous causes
•
adequate protection to prevent entry of water
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•
storage with adequate spacing
•
critical M/C to the extent possible stored in covered locations
•
adequate spacing for movement of vehicles
•
assembly and securing of M/C in accordance with design specifications
•
proper levelling of fixed items, bed plants, columns, etc
•
security of holding down bolts
•
alignment of shafts, bearings, etc
•
alignment of external pipe work, ducting, etc
•
opening up of M/C, bearing, etc. in a clean environment
During project construction period
•
periodic progress report-showing progress vis-à-vis planning schedule
•
delays to be clearly analysed
•
regular site inspections
•
implementation of safety measures and periodic checking
•
in the case of high risk/value activity, expert to be engaged
•
adequate security
•
work permit system
•
fire fighting system
•
waste/refuge removal from the site
Final commissioning and testing
•
It is recognised as the time of greatest risk in the life of the plant and machinery.
•
to organise commissioning efficiently and to allocate sufficient resources
•
to be supervised by commissioning manager
•
regular operating personnel to be involved
•
specialists for proprietary items to be present
•
possibly a trouble-shooting team to be present
Commissioning hazards
•
Pressure testing being a hazardous activity should be carried out under the supervision of a competent person.
•
Temporary connections and hoses are often used, so extra care is required.
•
Plant may leak due to loose connections.
•
Nitrogen purging may involve hazard of personnel asphyxiation.
•
Rotating M/C may be over speeded to test safety devices.
•
Commissioning requires the use of utilities in large quantities so care to be taken not to deprive other parts of
essential utilities.
Loss minimisation
Some of the important loss minimisation measures are:
•
schedule revision
•
use of additional personnel
•
transport of spare parts if required
•
modification in the design of the plant for cutting down the construction and erection time
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Risk Management
•
provisional repairs
•
procurement of spares at higher costs for quicker deliveries
•
relocation of production to other plant facility
•
use of leased machinery
Risk minimisation steps
•
layout
•
process blocks/tank ages/utilities are adequately separated
•
hazardous processes/material may be located at safe distance
•
product loading/unloading areas where vehicles and men assemble may be kept away from hazardous areas
•
adequate approach for fire fighting equipment for buildings and equipment
•
electrical installation
•
should be as per TAC requirements
•
protection against lightning to be provided
Quantitative risk assessment
Quantification of risks from major accidents is performed by carrying out following steps:
•
identify potential hazardous events-hazard operation and hazard analysis
•
develop the potential hazardous events into accident scenarios event tree, cause consequent diagrams, dow fire
and explosion index
•
assess consequence of accident scenarios-computer simulated models
Environmental aspects of risk management
•
hazardous goods to be stored at safe distances
•
to develop green belts
•
use of rail for transportation of goods
•
use of pipelines
•
trained vehicle crew to avoid accidents
•
company policy on health, safety and environment
Role of insurers in risk management
•
to develop ability to evaluate the hazards
•
to influence changes where practicable
•
devise appropriate terms of cover
•
to assess not only the physical properties of the plant but also the adequacy of the effective management and
operation
•
quality control
•
safety procedures
Risk minimisation for machinery
•
identify critical machinery
•
to provide standby facility
•
maintenance of critical spares
•
preventive and maintenance procedures
•
qualified and experienced operators
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•
maintenance of logbook and records of overhauling and loss
•
regular inspection to check that all operating parameters are within limits
•
timely replacement of parts with limited life and parts
Risk minimisation for boilers and pressure vessels
•
to meet all statutory regulations
•
to carry out safety audit
•
regular inspection to check for operating parameters and leakages
•
logbook and maintenance record maintenance
•
to maintain quality of fuel, water, etc.
•
proper training to employee in operation and safety
Risk management in machinery consequential loss
•
to identify critical machinery
•
to carry prevention and maintenance procedures strictly as per manufacturer’s guidelines
•
to provide on-site repair facility
•
to maintain adequate spares
•
arrangement with similar industry for critical spares
•
regular training for workers
•
identify and keep record of repairers/suppliers/ supplier’s nearest to the plant
•
for critical machinery, identify more than one repairers/suppliers
•
to select right equipment, indemnity and deductibles under insurance policy
Risk minimisation for electronic equipment
•
annual maintenance contract
•
to phase out obsolete equipment
•
backup media to be stored at separate location
•
identify outside agency for carrying out similar work
•
regular maintenance of hardware and cables, connectors, batteries, UPS, and so on
•
proper training of employees
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Annexure II
Institute Cargo Clauses A, B and C
Coverage: ICC (C)
•
Fire/Explosion
•
General Average sacrifice
•
Sinking/Capsizing
•
Jettison
•
Overturning/Derailment of land conveyance
•
Collision/contact of vessel/craft/conveyance with any external object
•
other than water
•
Discharge of cargo at a port of distress
•
Both to blame collision coverage
Coverage: ICC (B):
In addition to above mentioned points, the following 3 points
•
Earthquake, volcanic eruption or lightning
•
Entry of sea, lake or river water
•
Sling losses
Coverage: ICC (A)
All risks associated with maritime adventure including those mentioned under ICC (A) and ICC (B) and not excluded
under the policy.
Exclusions
•
Wilful misconduct of the insured
•
Ordinary leakage, loss in weight/volume or ordinary wear and tear
•
Insufficiency or unsuitability of packing/stowing
•
Inherent vice of the subject matter
•
Delay
•
Insolvency or financial default of the owners, managers, charters or operators of the vessel.
•
Deliberate damage/destruction
•
War and SRCC risks/radioactivity exposure risk/nuclear weapon risk/terrorist risk, etc.
•
Un- sea-worthy vessels/craft provided the insured
Add-on Covers
•
War Risks-cargo/air cargo
•
Extra storage risk at port/carrier’s warehouse
54/JNU OLE
Annexure III
Types of Losses
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
-
Definition
Estimation
Elimination
Absorption
Indemnification
Prevention
Minimisation
Reduction
Avertion
Expectation
Identification
Realisation
Specification
Clarification
Revision
Valuation
Verification
Sophistication
Construction
Cessation
Stagnation
Operation
Invention
Introduction
Close - down
Shut - Down
Restoration
Protection
Reservation
Administration
Restication
Opposition
Proposition
Imposition
Exhibition
Innovation
Renovation
Reorientation
Competition
Corrosion
Resentment
Pilferage
Marketing
Management
Commitment
Housekeeping
Controlling
Auditing
Facilities
Amenities
55/JNU OLE
Risk Management
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
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LOSS
LOSS
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LOSS
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LOSS
LOSS
LOSS
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LOSS
LOSS
LOSS
LOSS
LOSS
-
56/JNU OLE
Law - and - Order
Rivalry
Talent
Panic
Failures
Oversight
Procedure
Vigilance
Belief
Philosophy
Imagination
Imitation
Intimation
Information
Interaction
Intuition
Invasion
Inaction
Incompletion
Indecision
Indication
Induction
Attraction
Arbitration
Cultivation
Attention
Integration
Disintegration
Accidents
Inculcation
Training
Practice
Drill
Shortcut
Long - cut
By - Pass
By - Lows
Inspection
Differentiation
Automation
Segregation
Separation
Location
Elevation
Compression
Tension
Stress
Strain
Fatigue
Living
Dyeing
Polishing
Painting
Heating
Cooling
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
-
Evaporation
Pressurisation
Refrigeration
Vaporisation
Confinement
Arranged
De-ranged
Optimistic
Pessimistic
Realistic
By - Peril - Natural
By - Peril - Unnatural
Intentional
Consequential
Justification
Testification
Glorification
Globalisation
Generation
Generalisation
Standardisation
Liberalisation
Legalisation
Regularisation
Abduction
Abortion
Activation
Laborisation
Mechanisation
Materialisation
Nationalisation
Numarisation
Rumarisation
Humanisation
Gasification
Polarisation
Iodisation
Popularisation
Purification
Politicisation
Hold - Up
Run - Out
Stay - on
Filtration
Defiltration
Humidification
Capitalisation
Cultivation
Criminalisation
Remotisation
Hearisation
Nearisation
Violation
Ventilation
Vibration
57/JNU OLE
Risk Management
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
-
58/JNU OLE
Visualisation
Boiling
Flaring
Dumping
Storing
Placing
Handling
Cutting
Welding
Electrification
Magnetisation
Electrostatication
Under - running
over - Running
Variation
Crystallisation
Blowing
Flowing
Lightning
Frightening
Vertigo
Heartigo
Signal
Direction
East
West
South
North
Sky
Earth
Rising
Falling
Eruption
Perspiration
Sweating
Dusting
Illumination
Insulation
Replacing
Repairing
Radiation
Rotation
Reverberation
Reproduction
Creation
Correction
Foundation
Approach
Demarcation
Communication
Transportation
Temparation
Heater
Cooler
Blower
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
-
Flow
Danger
Deletion
Addition
Declaration
Decentralisation
Construction
Demonstration
Damage
Salvage
Range
Standby
Alternative
Aeration
Explosion
Implosion
Bursting
Bearing
Botheration
Bifurcation
Beautification
Habits
Customs
Clearing
Booting
Breathing
Shuttering
Scaffolding
Supporting
Siphoning
Sprinkling
Smoking
Acting
Reacting
Crawling
Flying
Undulation
Depression
Back - flow
Stop - of - flow
Steam - flow
Synchronised - flow
Signs
Symbols
Specimens
Complication
Clarification
Continental
Creation
Distraction
Captivation
Cataliation
Concretisation
Controlisation
Penalisation
59/JNU OLE
Risk Management
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
LOSS
-
60/JNU OLE
Operation
Non-operation
Dramatisation
Under - Insulation
Over - Insulation
Examination
Entry
Inventory
Insertion
Extraction
Annexure IV
Inspection
1. Inspection
Prior to acceptance
After acceptance
After modifications
After claim
After reinstatement
2. Inspection
For rating
For de-rating
For over rating
3. Inspection
During construction
During testing and commissioning
During operation
During shutdown
During accident
4. Inspection
For rating
For improving
For loss minimisation
5. Inspection
For PML
For critical activity
For critical area
6. Inspection
Through report
Through discussion
Through physical inspection
Through inspection and discussions
7. Inspection of
Risk Item Rating System
Risk Rating System
8. Inspection of
Plant
Surroundings
Machinery
OSBL/ISBL limits
Storage
Installation
Equipment
Utilities
61/JNU OLE
Risk Management
9. Inspection of Risks
General Liability
Public Liability
10. Inspection of Risks
Material Damage
Loss of Profit
11. Inspection for Knowing
Communication
Segregation
Separation
12. Inspection High Hazard
Risks Study of Flash Point and other parameters
13. Inspection
Buckets
Hand Appliances
Hose reels
Sprinklers
Storage Pumps
Standby arrangements
14. Inspection
Fire fighting arrangement
Own arrangements
Mutual aid arrangement
Local Authority arrangement
Study of Congestion Railway Crossing,
Traffic rules
Opening of gate, time for intimating, arriving, etc.
15. Inspection
Detectors
Valves
Control Valves
Warning Valves Warning and Acting Valves
Automatic Valves Sprinklers
Automatic Sprinklers
Pressure Detectors
Smoke Detectors
Leakage Detectors
16. Inspection of Rescue arrangements for knowing in advance for taking remedial measures
17. Inspection (Past)
Pinpoint the peril
Check up possibility of repetition in the same area
Check up possibility of similar incidents in other areas to Suggest remedial measures in all areas
18. Inspection -On Fault Tree Basis
62/JNU OLE
Of Perils in all cases
‚‚ effect of peril on its own
‚‚ effect of peril on activation
‚‚ effect of peril in consequence of others
19. Inspection - Identification of the area of origin
Area of blocks
Area of plants
20. Inspection should be with - clear Sight of Goal.
Open eyes
Analytical mind
Logical thinking
63/JNU OLE
Risk Management
Annexure V
Properties of Chemicals
TLV:
Time weighted average; concentration of a substance to most workers can be exposed without adverse effect.
IDLH (immediately dangerous to life or health)
Maximum concentration from which one can escape within 30 minutes without experiencing any irreversible health
efforts.
Hazards due to various chemicals:
Ethylene hazards
•
Vapour may cause nausea
•
Liquid may cause freeze injury
•
Sparks, flames and heat can cause explosion.
Chlorine hazards
•
Irritation to eyes, nose and throat.
•
Vapour can cause headache, cough, pain in the body.
Ethylene Di Chloride (EDC)
•
May cause headache, irritation.
•
Affects central nervous system
•
Toxic effects on liver and kidney.
•
Highly flammable
•
Burning releases toxic gases
•
Sparks, flames and heat can cause explosion.
Ethylene Glycol (EG):
•
Causes irritation
Ethylene Oxide (EO)
•
Liquid vapour causes irritation and burns
•
Liquid absorbs through skin, damages internal organs
•
Highly flammable
•
Violently reactive
•
Sparks, flames and heat may cause explosion
Hydrogen (H)
•
Non-toxic gas
•
Highly flammable gas
•
Explodes when mixing with air
•
Easily ignited
64/JNU OLE
•
Lights, sparks, flames, welding materials can cause explosion
Adpe (Indo Thene)
•
Non-toxic
•
Non-hazardous when solid
•
Can catch fire
•
Being hot will melt and cause burn injury
Liquefied Petroleum Gas (LPG)
•
Exposure may cause light headache and drowsiness
•
Over exposure may cause unconsciousness and may be fatal
•
Highly flammable
•
Dangerous when exposed to heat or flame
•
Reacts with Glycol oxidising material
Tri Ethylene Glaco (TEC)
•
Irritation to skin on contact
•
Can catch fire
Vinyl Chloride (VC) (sweet Smelling Colourless Gas)
•
Extremely poisonous
•
Extremely hazardous to health
•
Body contact may prove fatal
•
Liquid causes freeze burns and damage to internal organs
•
It is carcinogenic
•
Highly flammable
•
Sparks, flames, heat, sunlight, air can cause explosion
•
Explosion proof fans for ventilation are necessary
Hydrochloric Acid/Chlorohydric Acid/Hydrogen Chloride (HCL)
•
Reacts with metal to produce gas
•
Prolonged inhalation damages teeth, jaw, respiratory tract, causes burns on human tissues.
Ortho Cylene
•
Clear colourless liquid
•
Toxic
•
Flammable
•
Exposure to heat and open flame leads to fire
Para Xylene
•
Colourless liquid
•
Toxic and flammable
•
Exposure to heat and open flame leads to fire
65/JNU OLE
Risk Management
Toluene
•
toxic
•
flammable liquid
•
colourless
•
odour
66/JNU OLE
Annexure VI
EML Calculation by Expert Risk Engineer of London for Reinsurance
Company
EML Calculation (Property)
From a property viewpoint the most damaging scenario envisaged for the EML calculation is the UVCE. Potential
sources for a UVCE exist in several plants on the complex, including the Olefins plant, VCM/PVC plant, Aromatics
plant, LAB, Linear, Alkyl, Benzene and Ethylene Oxide plant loss of containment from storage areas are considered
to be catastrophic scenarios.
The Olefin plant location, replacement value and inventories of C and C identified it as the EML plant. The
2
3
scenarios considered in the olefins plant include: ­
Loss of containment from splitter 21-12-340 due to a rupture of the bottom line. The column is 2.6m in diameter
and 56.8m in height and contains approximately 50T of flashing liquid. The normal liquid level of the column is
10t and considering 15% of the remaining tower volume a cloud size of 32.5t is considered.
Loss of containment from the propylene refrigeration circuit of the ethylene plant. The largest hold up exists in the
4th stage suction drum 21­12-404. Storage pressure and temperature are 10.5kg/cm and 24 oC respectively, a cloud
size of approximately 15T is envisaged.
Allowing for cloud size, location in the plant, cloud drift, the resultant damage has been calculated.
The present sum insured of US$ 150 Mio was not felt to be a realistic replacement value and a figure of US$ 300
Mio was used in the EML calculation.
Based on the above scenarios, and allowing for debris removal, the property EML for the site is considered to be
US$ 150 Mio.
EML Calculation (Business Interruption)
The gross profits for IPCL for the year 1992-93 were Rs. 1.2 Billion, equivalent to US$ 44,293. The loss of profits
sum insured provided by the New India Company for the complex is US$ 266 Mio.
The GOP Plant produces ethylene which is used as feedstock in the LDPE, EO, EG, VCM/PVC, PP, ACN, PBR,
LAN and PR plants. A UVCE in the GOP plant could have the consequence of shutting these plants down unless
alternative feedstock is found. Without a detailed breakdown of individual sales for each plant, it is assumed that
70 - 75% of the gross sales would be lost:
I.e. 75% of US$ 266 Mio = 200 Mio US$.
The combined property and BI loss is therefore calculated as US$ 350 Mio.
67/JNU OLE
Risk Management
68/JNU OLE
Annexure VII
Recommendations for Risk Improvement
Recommendations made by expert risk engineers deputed by the reinsurance company for the inspection of Mega
risks in India and to make recommendations for the improvement of risk to continue reinsurance arrangements.
Recommendations for Risk Improvement
A summary of the recommendations for risk improvement are given below. We would appreciate response to their
recommendations within three months of the management team receiving them.
Pressure Relief Valves
Where a block valve is located beneath a PRV, the block valve should be ‘car sealed’ open as a precaution against
isolation of the PRV. This applies to both the process and storage areas.
Remotely Operated Isolation Valves
Remotely Operated Isolation Valves should be fitted to the liquid outlets of those process vessels which feed pumps
and contain a large inventory of flammable materials. In this category we would include vessels containing 5m³ of
LPG (or similar materials) and vessels containing 10m³ of other flammable hydrocarbons.
Fixed Fire Protection over Lube/Seal Oil Packages
It is recommended that deluge protection should be provided where lube and seal oil consoles are located directly
below critical compressors as in the Methanol plant.
Control Room Protection
The control room should be provided with smoke detection in the floor and ceiling voids. Toxic and flammable gas
detectors should also be installed in the air conditioning inlet providing an interlock system with the air conditioning
system.
An emergency control room containing comprehensive data including p + Id’s, emergency procedures, meteorological
data, etc, should be installed on site in accordance with the results gained from the forthcoming EIL risk
assessment.
Full Flow Tests on Fire Pumps
Full Flow tests on fire pumps should be carried out, in accordance with NFPA­ 20. The characteristic curve of
the pump should be generated and compared with the original design specification, to ensure the designed water
requirement can be provided.
Positive Interlock on LPG loading
The LPG truck loading operation should be addressed on the risk assessment to be carried out by EIL. Depending
upon the proposed frequency of use and probability of leakage, the requirement for a positive interlock system with
the truck earthing system should be identified.
Pre-pop of Pressure Relief Valves
Pressure relief valves should be pre-pop tested prior to dismantling, in order to determine their in-service relief
pressure and therefore accurately determine the frequency of testing required.
Plant Change Procedure
It is recommended that the plant change procedure should include a requirement for a safety review to be carried
out which should identify whether a full Hazop is required. In addition there should be a facility highlighting the
requirement to update records following the modification ie. SOP’s p + Id’s, etc.
69/JNU OLE
Risk Management
Computerisation of Inspection Records
The present inspection records are stored manually. It is recommended that the system be computerised to facilitate
back-up of the information and also to aid trend analysis.
Positive Material Identification
A Texas Nuclear Analyser is available on site for positive material identification of critical alloys. It is recommended
that a formal procedure be established to ensure all critical alloys are analysed. Losses due to incorrectly specified
material being used in critical services have been recorded in the hydrocarbon processing industry. It is also essential
to ensure that off-cuts issued from the warehouse to the plant are ‘rechecked’ before installation in the plant.
Fireproofing standards used on site
It is recommended that the standards of fireproofing on site be assessed in line with an internationally accepted
standard e.g. API 2218 “Fireproofing in the Process Industries”.
70/JNU OLE
Annexure VIII
Estimation of PML of an Ammonia Plant by an Engineer of a Public Sector
Insurance Company
Estimation of PML
It is assumed that a runaway reaction in the synthesis converter of an Ammonia Plant could be the cause of a
catastrophic explosion.
Total volume of synthesis converter = 71 m³
Catalytic volume and occupied volume = 35.5 m³
Free volume to this synthesis = 34.5m³
Converter (U fire) = 1217.8 cu ft
Other conditions in the synthesis converter Pressure (operating) = 220 kg/cm² = 3234 psi
Temperature (operating) = 500 C = 773 K P = 1.5p
Hydrantic Test (operating) = 1.5 x 3234 = 4851 psi
Pruphase is taken as 1.5p = 1.5 x 4851 = 72.765 psi
Hydrantic Test
TNT yield in perils calculated in isothermal expansion into open air. M = 9.494 x 10-5 x U fire x p1 x Ln P1/P2
Where, M = Mass of TNT in lbs
V fire = Fire volume of vessel in cult
P1 = Maximum pressure of vessel failure in psi.
P2 = Final pressure after expansion into Atmospheric condition
(i.e., 14.7 psi) Subsequently the valves we have. M = 9.494 x 10-5 x 1251.8 x 7276.5 x Ln 7276.5/14.7
= 9.494 x 10-5 x 1217.8 x 7276.5 x 6.204 = 5219.38 lbs of TNT = 2370.29 Kg of TNT
The damage what would be expected would be as under
Damage Radii
R1 (80% damage) = 61m
R2 (40% damage) = 109m
R3 (5% damage) = 173m
Therefore in the event of an explosion in a synthesis converter, it may be estimated that damage would be
approximately 80% within the radius of 61m from the centre of the synthesis converter. The damage would be
approximately to the type of 40% and 50% for the properties lying within 109m and 173m respectively.
In the absence of the availability of the values of the properties situated within the above radii, we have not calculated
the PML in rupees but the insured may be given the idea of the same if the values of the concerned properties are
known.
71/JNU OLE
Risk Management
Annexure IX
Estimation of MPL by an Engineer
Estimation of MPL
In this plant, considering the process conditions and type of hold ups, it is felt that there would not be a possibility
of a major vapour cloud explosion. The estimation of MPL is, therefore based on the rupture of ammonia converter
R-70 due to a RUNAWAY reaction. The rupture pressure is taken as 1.5 times the hydraulic test pressure.
The calculation of potential energy released is based on isothermal expansion into ambient air.
WTNT=C2V1xP1x 1nP1/P2.
Where,
WTNT = TNT Equivalent in Kg.
C2 = Constant = 2.23 x 10-7
V1 = Volume of Ammonia Converter = 36 M³
P1 = Rupture Pressure = 1.5 x 1.5 x 260 = 585 Bar.
P2 = Ambient Pressure=1Bar
WTNT =
2.23 x 10-7 x 36 x 585 x (1n 58 ÷ 1)
= 2.23 x 10-7 x 36 x 585 x 6.825
= 3.205 x 105 x 10-2
= 0.03205
= (3205.27)1/2
= 10 x 1.48
= 14.8
R=4.6x14.8 =68.08mx69m
= 8.02 x 14.8 = 121.36 m = 122 m
= 13.00 x 14.8 = 192.4 m = 93 m
PML Estimation
The MPL is that which may occur when the most unfavourable circumstances are more or less exceptionally combined
and when as a consequence, the fire is not or is unsatisfactorily fought and is therefore only stopped by impossible
obstacles or by lack of combustible material.
The process conditions and type of hold ups are not considered such that a major vapour cloud explosion potential
could be established as basis for MPL estimation. Our estimation is based on the rupture of the ammonia converter
R-701 due to a RUNAWAY reaction. The rupture pressure is taken as 1.5 times the hydraulic test pressure = 1.5 x
380 bar = 570 bar. The calculation of the potential energy released is based on isothermal expansion into ambient
air. Based upon the Swiss-Report, MPL damage radius works out thus.
Then the maximum probable direct damage caused by the pressure wave can be as under:
In the 80% Damage
Zone
Rs. in Million
Ammonia Plant
30%
894.90
Boiler
25%
50.00
Methanol Plant
30%
79.41
Class Unit
15%
4.50
1,208.8
72/JNU OLE
823
In the 40% Damage
Zone
Ammonia Plant
20%
596.66
Urea Plant
12%
67.20
Boilers
50%
100.00
Clause Unit
60%
18.00
Methanol Plant
50%
132.35
Ammonia Storage
15%
5.50
919.86
In the 5% Damage
Zone
Ammonia Plant
35%
104.41
Urea Plant
65%
364.00
Boilers
25%
50.00
Clause Unit
25%
7.50
Methanol Plant
20%
52.94
Ammonia Storage
70%
26.00
Cooling Towers
20%
20.00
625.85
367.94
31.24
1222.18
Secondary damage such as missile effect
and fire caused by the initial event (guessed)
90.00
1312.18
Estimation of loss of profit (LOP -MPL). The same scenario serves for assessment of LOP -MPL LOP is insured
on gross profit basis TSI Rs. 1800 M (91-92)
The LOP-MPL is calculated as follows:
Polarisation of ammonia area plant during the whole guaranteed period. Period (12 Months) Rs. 1800.00
Savings (Supposed) Rs. 270.00 Rs. 1530.00 Million
Combined MPL would therefore be as under:
MPL MD Rs. 1312.18 MPL LOP Rs. 1530.00 Rs. 2842.18
Say Rs. 2842 Million.
73/JNU OLE
Risk Management
Annexure X
Estimation of PML in a Synthesis Converter of an Ammonia Plant
Estimation of PML
It is assumed that runaway reaction in the synthesis converter of Ammonia Plant could be the cause of a catastrophic
explosion.
Total volume of synthesis converter = 100M³
Catalytic volume and other -occupied volume = 70 M³
Free volume within the synthesis converter = 30M³ =1059.501Ft³.
Other conditions in the synthesis converter Pressure (Operating) = 220 Kg/cm² = 3234 psi
Temperature (Operating) = 500 °C = 773 °K
P hydraulic test is 1.5
P (operating) = 4851
P rupture is taken as 1.5 P hydraulic test = 7276.5 psi
TNT yields in pounds calculated as isothermal expansion into open air
M = 9.494x10-5xVfreexP1x1n P1
P2
Where M = Mass of TNT in lbs.
V = Volume of vessel in cu.ft.
P1 = Maximum pressure of vessel failure in psi
P2 = Final Pressure after expansion in Atmospheric condition
(14.7 psi)
Substituting the values:
M = 9.494 X 10-5 x 1059.501 x 7276.5 x 1n 7276.5/14.7
1n (49.5)
6.204
= 4540.93 lbs of TNT
= 2062.18 Kg. of TNT
R1 4.6 3 2062.18 59m 80%
R2 8.2 3 2062.18 104m 40%
R3 13 3 2062.18 165m 5%Damage
Based on the damage radii
80%. 59m
40%. 104m
5% .165m
Plants within 80% damage radius
60% of Ammonia Plant-I (assumed)
Plants within 40% damage radius
(i) Remaining 30% of Ammonia Plant
0.30 x 2858.9 = 429.00
2
(ii) 100% of Power House and Steam Gen. Plant. 2= 1478.2
(iii) 25% of D M Plant
170 = 42.5
4
1949.7
=
780
Plants within 5% damage radius
(i) Remaining 10% of Ammonia Plant 143.00
74/JNU OLE
(ii) 75% of DM water plant * 127.50
(iii) 25% of Urea silo (assumed) 25.00
(iv) 25% of Ammonia II Plant 357.40
652.90 33
Total 1500
(* assuming DM Plant to be in 25% of offsite)
Damage as a result of explosion in Synthesis Converter in Ammonia Plant-II.
As the process conditions are identical to those of an Ammonia Plant-I
The damage radii would also be identical, that is
80% 59m
40% 104m
5% 165m
(Amount in Rs. million)
The properties falling within 80% damage radii are about 60% of Ammonia Plant -II
(i.e. 0.6 x 2858.9)
690
2
The properties falling within 40% damage radii are (i) Remaining 30% of Ammonia Plant II 429.0 (0.3 x
2858.9)2
(ii) Cooling Tower for Power Plant and substation number 4 (assumed) -35.00
464.00
186
The properties falling within 5% damage radii are
(i) About 25% of Ammonia Plant -I .357.40
(ii) About 25% of Power Plant -369.60
727.00
36
Total 912
As estimated damage as a result of explosion in the Synthesis converter of Ammonia -I plant is higher i.e. Rs. 1500
million, MPL may be taken as Rs. 1500 Million.
Loss of profits policy:
KRIBHCO have indicated likely sum insured of Rs. 2000 million in respect of Gross Profit of their Complex.
As the Report reveals, they have two streams of Ammonia plants and four streams of Urea. During inspection, it
was observed that piping is done in such a way as to afford flexibility of working with various sections of the Plant.
Thus, Ammonia Plant I can feed Urea Plant II and vice-versa.
Property Damage PML is based on accident in Ammonia Plant - I. This would leave Urea Plants un-affected. Thus,
in the worst case the maximum production that will be lost will be that of one stream i.e. 50% of the total production
of Urea. Hence, the maximum loss under the LOP that can be expected would be Rs. 1,000 million. i. Material
Damage ... Rs. 1,500 million ii. Loss of Profits _______ Rs.
1,000 million
Rs. 2,500 million
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Comparison between the institute cargo clauses [A], [B] and [C]
A Comparative analysis of the Institute cargo clause (A), (B) and
(C) is possible with the following chart: -
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Other clauses which are common to ICC [A], [B] and [C]
•
Transit clause
•
Termination of contract of carriage clause
•
Change of voyage clause
•
Insurable interest clause
•
Forwarding charges clause
•
Constructive total loss clause
•
Increased value clause
•
Not to inure clause
•
Duty of assured clause
•
Waiver clause
•
Reasonable despatch clause
•
English law and practice clause
•
Footnote prompt notice for “held covered” situations.
Duration:
The duration of cover is the same for all the three clauses.
It commences when goods leave the consignor’s warehouse and terminates on arrival at the final warehouse at the
destination. However, the maximum duration of cover is 60 days after completion of unloading at the final port of
discharge. For example, if the goods are cleared on the 60 day after discharge and meet with an accident on the 61
day while proceeding to the inland destination point, the CLAIMIS NOT PAYABLE.
The warehouse to warehouse cover applies only to marine perils, extraneous risks and S.R.C.C. perils. The war
cover will apply only on the cargo, which is on board the ocean going vessel i.e. there is no war cover before loading
and after unloading from the ship.
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Annexure XI
Extracts from Swiss-re Publication on Catastrophes
Catastrophes in 2002: Comparatively low insured losses despite the large burden from floods
Persistently high number of catastrophes since the end of the 1980s
344 catastrophes in 2003 Sigma recorded 344 large losses in 2002, of which 130 were the result of natural catastrophes
and 214 man-made disasters. This figure is slightly above the average figure that has been recorded by Sigma since
the end of the 1980s. The chronological list of all large losses in 2002 reported by Sigma.
24,000 deaths from catastrophes in 2002 11,000 fatalities from natural catastrophes
Sigma’s records indicate that there were 344 catastrophes in 2002 in which 24,000 people lost their lives-almost
11,000 of these dying as a result of a natural catastrophe. The earthquake of 25 March in Afghanistan alone claimed
2000 lives. When listed by cause, floods claimed the most victims, namely more than 4000 lives.
13,000 fatalities from man-made disasters
Man-made disasters resulted in more than 13,000 fatalities in 2002. The events with the most serious consequences
were an arson attack on a train in India, which sparked off social unrest, and the sinking of the Senegalese ferry “Le
Joola” off the coast of Gambia on 26 September. Broken down by cause, road
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Percentage share of event group in total
Dead and missing
Property and business interruption losses, excluding life and liability insurance losses
Swiss - Re. Sigma number 2/2003
Activities, key parameters and RAMP process at each stage of investment life-cycle.
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*These have a potential impact on one or more financial parameters.
The operator has primary responsibility for operating the asset and generating benefits (in the fifth stage). All three
roles may be involved in the sixth and final stage, close-down, the leading role depending on the situation and
nature of close-down.
A way is needed for evaluating financially the risks to which an investment is exposed in terms of the objectives
and the parameters used to define them (e.g. revenue, other benefits, capital and operating costs). Also needed is
some overall measure of the value of the investment (e.g. pay-back, IRR or whole-life NPV).A suitable investment
model needs to be developed in order to:
•
Estimate the likely financial outcome of the project and ascertain whether it meets any predetermined financial
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criteria as to what constitutes a viable.
•
Estimate, the extent to which the financial outcome may vary from the likely value, and the probabilities of
different degrees of variation.
• Show which methods of risk mitigation are financially worthwhile.
An appropriate structure for such a model is illustrated in the figure. Details of how the model can be constructed
are set out in Appendix 2. The key parameters are gross revenues, the value of any other benefits, capital costs and
operating costs.
For preliminary appraisals, a simple investment model can often be processed by hand with the aid of no more than
a pocket calculator. For a full appraisal it would be more typical for the investment model to be set out in the form
of a spreadsheet, which is processed by computer.
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Annexure XII
Risk Management Technique as Outlaid by Practicing Expert Risk Engineers
following the RAMP Process (Rosl Analysis and Management for Projects)
Where, as is often the case for major projects, the main aim of the investment model is to calculate the net present
value (NPV) of the project, each parameter in the financial model is represented by a value or a series of cash flows.
Each of these is then converted into an NPV using an appropriate discount rate, so that the estimated whole-life NPV
for the project can be calculated. During the RAMP process, the financial model is used repeatedly to assess how
potential impacts of risks on the individual parameters affect the whole-life NPV of the investment i.e. the ‘riskiness’
of the investment. This is typically done by using scenario analyses, Monte Carlo simulation or sensitivity analysis.
A similar method can be used to compute the internal rate of return (IRR) where this is required.
Risk prompts
One of the main tasks in RAMP is to identify risks as comprehensively as possible. A risk which has not even been
identified cannot be analysed or evaluated. Hence, it is of great importance to do everything possible to list every
risk to which the project in question could be exposed. Brainstorming sessions and desk studies are very useful for
this purpose, but in addition it is often helpful to use risk prompts, which suggest possible areas of risk, to uncover
further risks which may affect the project.
Process description
The RAMP process consists of four activities, which are generally carried out at different times in the life-cycle of
an investment as indicated below.
•
Process launch: conducted early in the investment life-cycle.
•
Risk review: conducted before key decisions or at intervals.
•
Risk management: conducted continually between risk reviews.
•
Process close-down: conducted at the end of the investment life-cycle or on premature termination.
Each activity is composed of several phases, each of which is made up of a number of process steps. The first and
last activities-process launch and process close-down are each performed only once , around the start and end of the
investment. There are a number of risk reviews carried out at crucial stages or time intervals within the investment lifecycle. Risk management activities are performed continually between risk reviews based on the analyses, strategies
and plans produced by the preceding risk review. The process launch will normally be a part of (or shortly followed
by) the first risk review, and the process close-down will be part of (or shortly follow) the final risk review.
Although the process launch is generally undertaken in full only once early in the life of the investment, it is likely to
be necessary to reconsider and revise its results and objectives during subsequent risk reviews and risk management
activities e.g. to reflect changes in investment objectives or other circumstances, possibly arising in response to
risk analysis.
Successive risk reviews and risk management activities will change in scope and focus as the investment progresses
through the various stages in its life-cycle. At each review, risks whose exposures have ended will be eliminated
from the analysis and plans and their contingency positions released; otherwise, each review will focus on future
risks, in the remaining stages of the investment (and not just the risks in the current stage).
Activity A: Process launch
1. Plan, organise and launch RAMP process including:
•
Confirm perspective
•
Appoint risk process manager and team
•
Define investment brief
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•
Determine timing of risk reviews
•
Decide level and scope of RAMP
• Establish budget for RAMP
2. Establish baseline, covering:
•
Objectives and key parameters of investment
•
Baseline plans
•
Underlying assumptions.
Activity B: Risk Review
1.
2.
3.
4.
Plan and initiate risk review
Identify risks
Evaluate risks
Devise measures for mitigating risks, including:
•
Reducing
•
Eliminating
•
Transferring
•
Insuring
•
Avoiding
•
Aborting
•
Pooling
•
5.
6.
7.
Reducing uncertainty and define mitigation strategy
Assess residual risks and decide whether to continue
Plan responses to residual risks
Communicate mitigation strategy and response plan.
Activity C: Risk management
1. Implement strategy and plans
•
Integrate with mainstream management
•
Manage the agreed risk mitigation initiatives
• Report changes
2. Control risks
•
Ensure effective resourcing and implementation
•
Monitor progress
•
Continually review and categorise ‘trends’
•
Identify and evaluate risks and changes
•
Initiate full risk review, if necessary
Activity D: Process close down
1. Assess investment out-turn
•
Consider results of investment against original objectives
• Compare risk impacts with those anticipated
2. Review RAMP process
•
Assess effectiveness of process and its application
•
Draw lessons for future investments
•
Propose improvements to process
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•
Communicate results
Component failure probabilities depend upon the circumstances within which the failure takes place. Primary failures
are failures which are thought to have occurred to the item under design operating conditions. Secondary failures
on the other hand are failures, which occur due to the presence of conditions beyond the design standards of the
component. Command failures are failures, which result from the component being commanded into an undesired
condition (e.g. a pump switched off when it was not intended to be switched off) due either to control system or
human failure. The reliability of humans is expressed the same way as that of components, namely by rates of
failure to perform particular tasks correctly. Indications are that they vary from the order of one in 20 to the order
of one in several million. On the other hand, the primary failure of components occurs within the probability range
one in 10,000 to one in 1,000,000.
One particular problem associated with the successful practical application of FTA is the selection of an appropriate
top event. The top event is a statement of something that can go wrong with the process or system being analysed.
As with any intuitive process, our ability to select an appropriate top event accurately is determined by experience
and expectation and is dependent upon an understanding of what can go wrong with the system or process. The
whole result of the analysis is obviously determined by this selection. An opportunity to determine the top events
which are possible in a given system is offered by the generic development possibilities of Event Analysis, which
relates the top events to the events/outcomes described in the risk estimation model. As defined, the risk estimation
model’s event is associated with a particular source of energy in a situation, which is described conceptually. The
fundamental Event mechanisms are a link between the event and possible top events for the particular system as;
Event analysis is an analysis at a conceptual level of the Event mechanisms, which are possible for a particular type
of energy source. In short, Event analysis ends with an identification of the top events to be considered for a particular
system. In some simple cases this can be achieved intuitively and is indeed done this way for the conceptually simple
problems associated with petrochemical plants. Such top events are typically a gas leak or fluid spill with Outcomes,
which include ignition, vapour generation and so on.
Event analysis carried out on an Event which is the loss of control of the potentially damaging properties of the
kinetic energy of a vehicle constrained to move in two dimensions (e.g. a road vehicle). A mobile object is controlled
in direction and speed on a plane surface by controlling steering, acceleration and deceleration. Speed is controlled
by increasing the energy input to the body or by dissipating energy from the body. In the case of motor vehicles,
the increase is achieved by the engine applying force to the tyres at the wheel -road interface so that the added
force produces an acceleration, or by going downhill when the weight force of the vehicle has a component in the
direction of motion, in accordance with Newton’s laws. Deceleration results from brakes being applied (or from
going up hill, when the weight force acts against the direction of motion). The brakes absorb energy in a useless way
by turning it into friction-generated heat. Steering relies on the friction forces, which can be generated between the
wheels and the road, with the steering wheels producing a sideways force when turned. Such a vehicle requires a
controller whose purpose is to decide what the position and speed of the vehicle needs to be and to take appropriate
action. The controller can be a simple mechanism such as a self-steerer on a sailing boat (which tries to maintain a
set course) or a relatively active and intelligent device such as an automatic pilot or person. The concept represented
by the analysis diagram can be applied to any type of technology, whether it is a motor car, tracked vehicle, rail
vehicle, floating vessel or animal-drawn cart.
Event analysis of a situation in which a recipient gains access to a stationary energy source, such as when a person
enters a damaging energy space like a jet engine test cell, a room in which there is an unshielded radiation source
or a part of the recipient’s body enters a machine which is in motion (such as a power press). The control options
are a passive positive exclusion barrier, an active positive exclusion barrier and procedural control, which require
appropriate behaviour of the recipient. These are equivalent to the use of fixed guards, warning signs and interlocked
guards.
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Note :
1. Items in italics are explanatory possibilities rather than mechanisms as such
2. A ‘mechanism of interaction’ is some means which exists for the object to interact with its environment.
Examples:
(a) motor vehicles interact with the road through their tyres, which enable them to either reduce or increase their
speed as well as change direction,
(b) boats interact through either their hulls or sails,
(c) rail borne vehicles interact through the rails.
3. Failure of system controller is the analysis of the controller function. The controller function is a concept which
applies generally to a number of different circumstances involving detection, possible cognition (in the case of the
animals and computers) and response.
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Note:
1. Items in italics are explanatory possibilities rather than mechanisms.
Escape from the source or can enter the space of the source. This situation is representative of workers on a road,
amongst others. In this case, so-called witches hats are a measure intended to direct the vehicles around the work
areas, that is, a procedural barrier. This is the only measure usually adopted and it will be noted that it does nothing
to ensure that the recipient stays away from the space of the vehicles. Anecdotal experience (three are no useful
accident records) suggests that this is the most common type of occurrence leading to fatality. This result is not
surprising when one realises that defining the work area for passing traffic does little to assist the worker’s peripheral
vision to identify the limits of the safe space.
Apart from providing a basis for fault free analysis, such analysis can be used to establish a basis for occurrence
investigation and classification procedures, which are specific to the circumstances of the analysis. Accidents occurring
in road work could be categorised in this special way to provide a greater degree of information in the industry. The
same applies to machinery accidents in manufacturing industry, vehicle accidents and so on.
The relationship of these analyses to fault tree analysis is worth exploring further. In figure 6.4b, the technology of
a motor vehicle as we know them today is assumed.
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Note:
1. Items in italics are explanatory possibilities rather than mechanisms as such
2. Controller function
3. ES is the energy source
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Annexure XIII
Stages of Risk Management as Per Risk Engineers of London
The risk management process has two principal stages, which are summarised below.
Stages of risk management
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Annexure XIV
Attitude Indication of Risk Management as Seen by Expert Risk Engineers
The utility theory simply measures the satisfaction a person will receive from particular levels of gain and what they
are willing to gamble in order to achieve that gain. For construction, this attitude affects the risks accepted by the client
and those, which are to be transferred to other parties. In this sense, one person’s risk is another’s opportunity.
People’s attitude toward risk may alter with the passage of time and from the outcome of situations they face, though
they are generally risk averse, risk neutral or risk seeking. This can be illustrated by the metaphors of a dinosaur,
ostrich and lemming.
The dinosaur is so conservative that he will not do anything out of the ordinary or outside his usual habit. He may
incur substantial costs to avoid relatively small risks.
The ostrich buries its head in the sand and does not care whether they occur or not.
The lemming goes head first into every situation never considering what the consequences of his actions might be.
He may be unaware of potential risks and, therefore, fails to take appropriate action to mitigate them.
The owl undertakes a structured approach to resolving problems involving risk.
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Annexure XV
Risk Management sequence according to some expert engineers
Assessment
Risk assessment is a formal review of uncertainties and exposures to loss and comprises:
•
Identification
•
Classification
•
Quantification
Management
Likewise, risk management involves:
•
Response
•
Review
Typical Risk Management Sequence
Identification - classification - quantification - response – review
How Does Risk Arise?
Risk can arise in many ways from a variety of factors, including changes in:
•
Circumstances - physical, political, legal, social, organisational, environmental and health and safety
•
Technology
• Attitude, perception and local knowledge
These risks are present at various stages, i.e. corporate strategic and project level as illustrated by the following
chart.
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Risk and Process Relationship
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Annexure XVI
Fault Tree Analysis of a Process by an Expert Risk
Engineer
Schematic representation of the situation at Cambrian Colliery immediately before 12:40 hours on 17
May, 1965.
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Annexure XVII
Errors and Communication Difficulties Outlined by an Expert Engineer
Common features observed in the development of major disasters and their relation to various stages of
development
Stage III-V in above table cover the area of most pre-existing disaster studies, and no attempt was made in the present
study to categorise events falling in these three stages. A final note may be made, however, in stage VI.
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Annexure XVIII
Disaster Management Technique
Natural disaster reduction
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Disaster Mitigation Flow diagram
Distribution of Number of Accidental Deaths by Natural and Un-natural Causes During 1995-96 (all India)
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Source: National Crimes Record Bureau
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Annexure XIX
List of Certain Commodities and the Nature of Loss or Damage to Which they
are Generally Susceptible
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Annexure XX
Technique for Analysis of Occurrence and Consequences According to Expert
Risk Engineers
Note: The letters A, B etc refer to further analysis or to text notes in the report accompanying the analysis. An
example of a Fault Tree Analysis
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Case Study I
An electricity retailer faces risks from numerous sources, including e.g. different market, volume and credit risks.
To manage them in the daily operative actions, the RM specialists and traders need a set of analysis methods giving
enough information. The selection of appropriate RM methods and setting rules for their usage is therefore a vital part
of a company’s risk strategy. The implementation involves acquiring of new software customised for the company’s
needs, installation into the computer system and training of the staff. This makes the process costly.
Value tree based framework was developed and implemented for choosing RM methods. The framework was
developed by an RM IT-systems provider in collaboration with prospective end users. In the model, the main criteria
for selecting RM tools are their (i) information utility, (ii) costs and (iii) usability.
Traditional value tree analysis requires the decision makers to give precise preference statements as well as precise
information about the options, which this was considered to be too an ambitious task. Thus, a novel method for
giving imprecise information was used, Rank Inclusion in Criteria Hierarchies (RICH) developed at the Systems
Analysis Laboratory at Helsinki University of Technology.
Combinations of six RM methods were evaluated:
•
Position reporting
•
Deterministic scenario analysis
•
Sensitivity analysis (Greeks)
•
Variance-covariance Value at Risk (VVaR)
•
Simulated Value at Risk (SvaR)
•
Maximum loss model (ML)
Because the value of information of these methods is not additive, the methods were evaluated in conjunction as
collections of methods. Using the evaluation framework, potentially good combinations were identified and eventually
implementation strategies were suggested. It was concluded that position reporting should be implemented first,
because of its low costs and ability to give basic risk information. It should be followed by scenario analysis due
to its cost-efficiency. In the third phase a decision between simulation VaR, variance-covariance VaR or Maximum
Loss should be made.
An array of financial risks (market, volume, operational, credit and
counterparty, system, political)
Risk evaluation – probability
The task is to choose methods for risk evaluation.
Risk evaluation – consequence
A thorough value tree –based evaluation of collections of potential
RM methods, based on their
Development and evaluation of RM meth1) Information utility
ods
2) Costs
3) Usability
Sequential implementation of RM methods suggested:
1) Position reporting
RM decisions
2) Scenario analysis
3) Decision between VaR, variance-covariance VaR and Maximum
Loss
Evaluation of implemented RM solutions __
Risk identification
The different steps of the RM process of the case are summarised in Table. The risk identification is not too a
demanding task since the main risk drivers in the electricity field are well known. As the task of the case was not to
deal with daily RM of the operative activities but, rather, to select tools for it, no actual risk evaluation was done. On
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the contrary, the study focused on the development and evaluation of RM methods. Because the main challenge was
to compare different solutions, a value tree framework was used. The process did not result in any real decisions as
such, but gave suggestions which methods to consider. As no RM methods were implemented yet, an evaluation of
their performance in action could not be done. However, it is an important task to be performed in the future.
Observations
•
The most important observations and conclusions from the electricity case are:
•
Electricity retailing entails considerable monetary risks, which in many respects are similar to those in other
trading activities. However, the non-storability of electricity sets its own flavour to the situation.
•
While usage of the analysis tools is a part of the every day work of the risk management specialists, choosing a
suitable set of risk analysis methods for the company is a strategic decision with a several years time horizon.
Changing the set of methods is both costly and time consuming, because any analysis solution available on the
market must be customised to fit the needs and IT-system of the company and the personnel must be trained to
use the new software.
•
When there are many available analysis methods, whose properties in respect of e.g. information value and costs
are more or less known, decision analysis tools can be successfully used to clarify the needs of the company.
The objectives of the company were structured using a value tree model. The elicitation of weights for the
sub-goals forced the decision makers to consider the RM method selection in a rational manner and not base
the entire decision on intuition solely. However, as assessment of precise preference statements was seen to
be too a demanding and even unrealistic aim, a method called RICH was used, enabling the use of imprecise
preference statements.
•
When searching a suitable set of risk analysis tools, the candidates cannot be evaluated in isolation one by one,
because of the partial overlap of the risk information given by the different methods. Thus, the value gained
by utilising a new method depends on the methods already in use. This obstacle was overcome by considering
the methods in sets.
•
Using the RICH method, it was possible to identify potentially good combinations and eventually a three-step
implementation plan was recommended.
Questions
1. What inputs does the traditional value tree analysis require?
Answer
Traditional value tree analysis requires the decision makers to give precise preference statements as well as
precise information about the options, which this was considered to be too an ambitious task.
2. Enlist the risk management methods evaluated
Answer
The risk management methods evaluated were:
•
Position reporting
•
Deterministic scenario analysis
•
Sensitivity analysis (Greeks)
•
Variance-covariance Value at Risk (VVaR)
•
Simulated Value at Risk (SvaR)
•
Maximum loss model (ML)
3. What are the main criteria for selecting RM tools?
Answer
In the model, the main criteria for selecting RM tools are their (i) information utility, (ii) costs and (iii)
usability.
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Case Study II
The mining case describes a reliability assessment of a safety system of an undersea mine using fault tree analysis
Air ventilation is important in mines; its main function is to dilute mine gases and dust concentration and to maintain
reasonable working temperature. Conventional ventilation methods approach their practical limits when the undersea
working goes further than 10 km from the shafts. To overcome this problem, air recirculation is used to boost the
ventilation capacity. However, recirculation has its own risks and must be shut down in abnormal situations, e.g.
in the case of fire. Therefore the safety authorities require a safety system with environmental monitoring and
automatic control systems in mines with air recirculation. In this case study the reliability of such a safety system
is assessed using fault tree analysis.
The recirculation fan transporting air from the return roadway back to the intake must be automatically shut down
in certain abnormal situations. The monitored critical properties are:
•
Methane entering the mine from the ground. High methane levels constitutes a sever fire risk.
•
Carbon monoxide, which is a reliable indicator of fire (monitored at two locations).
•
Air recirculation factor (must not be too high, due to regulations)
•
Fan vibration
•
Activation of water curtain (fire control)
•
Emergency stop buttons
Whenever one of the monitored properties satisfies its trip condition, the recirculation fan should stop. This system
can fail in two ways:
i. to fail to shut down the recirculation fan when a trip condition is fulfilled or
ii. to switch off the fan when no trip condition is fulfilled. The former is more critical and may have
severe health impacts. Although the latter is less critical, a spurious fan stoppage is inconvenient,
deteriorating the conditions in the mine due to high dust and heat levels.
Fault trees were constructed and quantified for both failure modes. The system was divided into eight sub-systems
according to different trip conditions, which resulted in a total of 16 fault trees. The table below gives details of the
risk management process carried out
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Two failure modes:
1. Safety system unable to function on demand
2. Spurious (gratuitous) activation of the safety system under norRisk identification
mal, healthy conditions
Failure mode and effect analysis (FMEA) (not covered in the case
study)
A thorough fault tree analysis of the safety system. System failure
modelled as combinations of specific component failures. Component failure rates assessed using general component failure dataRisk evaluation – probability
bases and maintenance records, repair times estimated by engineers
at colliery. System reliability was concluded to be on a reasonable
level.
No formal consequence evaluation made. Failure to detect high
Risk evaluation – consequence
methane or carbon monoxide levels most critical of the studied
failures.
Three safety improvement strategies considered and evaluated using fault trees:
Development and evaluation of RM
1. Variations in system design
methods
2. Inspection interval changes (maintenance)
3. Shortened repair times
Should safety improvements be necessary, best effect is attained
RM decisions
by shortening the inspection intervals of the methane and carbon
monoxide monitoring systems.
Evaluation of implemented RM solutions Risk management process in mining case
The most important observations and conclusions from the mining case are:
•
The authorities try to improve workers’ safety in mines by demanding the use and evaluation of certain safety
systems. In order to make sure that the mining companies do not jeopardise the miners’ lives by saving money
in wrong places.
•
From a systems’ reliability point of view, a safety system is very similar to other systems in the process industry
for which there are well established analysis methods available. In analysing the reliability of a well defined
system of independently failing components, fault tree analysis is a powerful tool.
•
For many components used in industry, general component failure databases are available. For more specialised
components, reliability estimates must rely on internal maintenance records or estimates given by the component
suppliers. In some cases, the only way to find information is to interview experienced working personnel.
•
A safety assessment is benefited most when performed in the planning stage of the system because the potential
structural changes are considerably easier to do. As the safety system in this case study was already installed,
it ruled out major structural changes as financially non-realisable.
•
The best safety improvement turned out to be shortening of the maintenance intervals of certain important
components that, in contrast to the majority of components, do not fail safe. Safety improvements do not always
require improvements of the system itself. Sometimes well directed changes in maintenance procedures are
more efficient.
Questions
1. What was the risk identified in the above described scenario?
2. What was the best safety improvement implemented?
3. Which properties were monitored in the recirculation system?
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Case Study III
This example risk assessment applies to food preparation and food service areas (restaurants, cafés, sandwich bars,
pubs, takeaways or hotel kitchens).
It shows the kind of approach a small business might take. It can be used as a guide to think through some of the
hazards in your business and the steps you need to take to control the risks.
The catering manager carried out the risk assessment in a café. The business employs five permanent staff working
a variety of shifts to prepare, cook and serve food. A young person under 16 helps on a Saturday to serve food and
load and unload the dishwasher. An employment permit for the young person has been obtained from the local
authority. One staff member does not speak English well. The business, which is located on the high street, is open
from 7.00 am to 5.30 pm.
The manager followed the guidance with the following steps to risk assessment
•
To identify the hazards, the manager:
‚‚ looked at the guidance on health and safety web pages for catering and hospitality and the employment of
young people;
‚‚ walked around the kitchen, the stockroom and all other areas, noting things that might pose a risk and taking
health and safety guidance into consideration;
‚‚ talked to staff to learn from their knowledge and experience, and to listen to their concerns and opinions.
He paid particular attention to the requirements for ensuring the young person’s safety;
‚‚ looked at the accident book, to understand what particular risks previously resulted in incidents.
•
The manager wrote down who could be harmed and how.
•
The manager then wrote down what controls, if any, were in place to eliminate or reduce the likelihood of
somebody being hurt. He compared these controls to the good practice in health and safety guidance. Where he
did not consider the existing controls to be good enough, he wrote down what else needed to be done.
•
The manager put in place the actions the risk assessment identified as necessary. He discussed the findings with
staff, pinned it up in a prominent place so that all staff could see it and made it part of the induction process for
new staff. He told the young person’s guardians about the findings of the risk assessment and how risk to that
young person will be controlled. And he made sure that the worker, who had difficulty understanding English,
had the safety arrangements explained to her in a language she understood.
•
The manager decided to review the risk assessment every year, or straightaway if major changes in the workplace
happened. To get a better understanding of the risks, the manager also asked staff to report any accident, however
minor.
Some hazards that were identified are summarised in the tables 1 and 2
Questions
1. What was the first step taken by the cafe manager to identify possible hazards at the cafe?
2. What was the frequency the manager decided to review the risk assessment plan?
3. What were the steps recommended to avoid harm from food handling?
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Risk Management
Bibliography
References
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A Risk Management Standard- Published by AIRMIC, ALARM, IRM: 2002. Available at: <http://www.theirm.
org/publications/documents/Risk_Management_Standard_030820.pdf> Accessed 3rd March 2011.
•
Fundamentals of Risk Management. Available at: <http://www.ewf.be/media/documentosDocs/doc_16_ewf644-08-fundamentals-of-risk-management.pdf> Accessed 1st March 2011.
•
Gabriele Schedl, Hazard Management in Practice. Available at: < http://www.qitweb.com/Safety/SMS_Hazard_
Management.htm> Accessed 3rd March 2011.
•
Hazard Management. Available at: <http://www.unisa.edu.au/ohsw/procedures/hazard.asp> Accessed 3rd March
2011.
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Hazard Management: Play it Safe. Available at: < http://www.justice.tas.gov.au/__data/assets/pdf_
file/0013/102091/GB081.pdf> Accessed 3rd March 2011.
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Hazard, Risk and Vulnerability. Unit 1. IGNOU. Available at: <http://egyankosh.ac.in/bitstream/123456789/3140/4/
Unit%2001.pdf> Accessed 3rd March 2011.
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James T. Gleason, (2002). Risk: The New Management Imperative in Finance. Bloomberg Press, 1st edition,
P243–245.
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Joe Tidd, John Bessant, Keith Pavitt. Managing Innovation. Available at: < http://www.managing-innovation.
com/tools/Risk%20Assessment%20Matrix.pdf> Accessed 4th March 2011.
•
Living with Risk. A Global Review of Disaster Reduction Initiatives. 2004 version. Risk Awareness and
Assessment. Chapter 2, section 3. Inter-Agency Secretariat of the International Strategy for Disaster Reduction
(UN/ISDR). Available at: < http://www.unisdr.org/eng/about_isdr/bd-lwr-2004-eng.htm> Accessed 3rd March
2011.
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Markus Porthin. Advanced Case Studies in Risk Management. Available at: < http://citeseerx.ist.psu.edu/>
Accessed 9th March 2011.
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Risk Management, Chapter 5. Condensed GSAM Handbook. Available at: < http://www.ewf.be/media/
documentosDocs/doc_16_ewf-644-08-fundamentals-of-risk-management.pdf> Accessed 1st March 2011.
•
Risk Management Plan. Available at: <http://interop.mt.gov/content/docs/IM_Risk_Management_Plan_v4_0.
pdf > Accessed 8th March 2011.
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Risk Management Policy NHPC Limited. Available at: < http://www.nhpcindia.com/writereaddata/English/
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Risk Management. Available at: <http://www.investorwords.com/4304/risk_management.html> Accessed 1st
March 2011.
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Risk Management: Concepts and Methods–white paper–CLUSIF. Available at: http://www.clusif.asso.fr/fr/
production/ouvrages/pdf/CLUSIF-risk-management.pdf> Accessed 3rd March 2011.
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The Risk Management Guide. Available at :< http://www.ruleworks.co.uk/riskguide/risk-evaluation.htm>
Accessed 3rd March 2011.
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TIFAC. Available at: <http://www.tifac.org.in/index.php?option=com_content&view=article&id=695&Itemid
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•
Various Aspects of Risk Management. Available at: < http://www.managementstudyguide.com/risk-managementaspects.htm> Accessed 8th March 2011.
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Recommended Reading
•
Annetta Cortez, (2010). The Complete Idiot’s Guide to Risk Management [Paperback]. Publisher: Alpha,368
pages.
•
Damon P. Coppola, (2011). Introduction to International Disaster Management [Hardcover].. Publisher:
Butterworth-Heinemann, 2nd ed. 696 pages.
•
Daniel P Stih, (2010). Healthy Living Spaces: Top 10 Hazards Affecting Your Health [Paperback]. Publisher:
Healthy Living Spaces, 1st ed, 138 pages.
•
David Vose, (2008). Risk Analysis: A Quantitative Guide [Hardcover]. Publisher: Wiley, 3rd ed, 752 pages.
•
Glenn Koller, (2005). Risk Assessment and Decision Making in Business and Industry: A Practical Guide
[Hardcover]. Publisher: Chapman and Hall/CRC, 2nd ed, 352 pages.
•
John J. Hampton, (2009). Fundamentals of Enterprise Risk Management: How Top Companies Assess Risk,
Manage Exposure, and Seize Opportunity [Hardcover]. Publisher: AMACOM. 308 pages.
•
John Pine, (2008). Natural Hazards Analysis: Reducing the Impact of Disasters [Hardcover]. Publisher: Auerbach
Publications, 1st ed. 304 pages.
•
Michel Crouhy, Dan Galai, Robert Mark, (2005). The Essentials of Risk Management [Hardcover]. Publisher:
McGraw-Hill; 1st ed, 416 pages.
•
Nigel Hyatt, (2003). Guidelines for Process Hazards Analysis (PHA, HAZOP), Hazards Identification, and Risk
Analysis [Paperback]. Publisher: CRC Press, 474 pages.
•
Paul Hopkin, (2010). Fundamentals of Risk Management: Understanding, Evaluating and Implementing Effective
Risk Management [Paperback]. Publisher: Kogan Page. 384 pages.
•
Piers Blaikie, Terry Cannon, Ian Davis, Ben Wisner, (2003). At Risk: Natural Hazards, People’s Vulnerability
and Disasters [Paperback]. Publisher: Routledge, 2nd ed.. 496 pages.
•
Tim Bedford, Roger Cooke, (2001). Probabilistic Risk Analysis: Foundations and Methods [Hardcover].
Publisher: Cambridge University Press, 1st ed., 414 pages.
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Self Assessment Answers
Chapter I
1. c
2. b
3. d
4. a
5. c
6. b
7. d
8. a
9. c
10. b
Chapter II
1. c
2. b
3. d
4. a
5. c
6. b
7. d
8. a
9. c
10. b
Chapter III
1. c
2. b
3. d
4. a
5. c
6. b
7. d
8. a
9. c
10. b
Chapter IV
1. c
2. b
3. d
4. a
5. c
6. b
7. d
8. a
9. c
10. b
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