Fundamentals & Terminologies of Shipping Risk
Management
Agenda









Different Definitions of Risk
Chance of Loss
Peril and Hazard
Classification of Risk
Major Personal Risks and Commercial Risks
Burden of Risk on Society
Techniques for Managing Risk
Sources of risk in Shipping Industry
Techniques for managing risks in shipping industry
DEFINITIONS OF RISK
 Risk: Uncertainty concerning the occurrence of a loss/loss
exposure
 Eg; risk of lung cancer for smoker is present because
uncertainty is present
 Risk of damage on the cargo is exist as the uncertainty is
present
 Loss Exposure: Any situation or circumstance in which a loss
is possible, regardless of whether a loss occurs.
OBJECTIVE VS SUBJECTIVE RISK
 Objective risk is defined as the relative variation of actual loss
from expected loss

It can be statistically calculated using a measure of dispersion,
such as the standard deviation
 Subjective risk is defined as uncertainty based on a person’s
mental condition or state of mind

Two persons in the same situation may have different
perceptions of risk

High subjective risk often results in conservative behavior
CHANCE OF LOSS
 Chance of loss: The probability that an event will occur
 Objective Probability vs. Subjective Probability
 Objective probability refers to the long-run relative frequency of an
event assuming an infinite number of observations and no change
in the underlying conditions
 It can be determined by deductive or inductive reasoning
 Subjective probability is the individual’s personal estimate of the
chance of loss
 A person’s perception of the chance of loss may differ from the
objective probability
PERIL AND HAZARD
 A peril is defined as the cause of the loss
 In an auto accident, the collision is the peril
 A hazard is a condition that increases the chance of
loss
CLASSIFICATION OF HAZARDS
 Physical hazards are physical conditions that increase the chance
of loss (icy roads, defective wiring)
 Moral hazard is dishonesty or character defects in an individual,
that increase the chance of loss (faking accidents, inflating claim
amounts)
 Attitudinal Hazard (Morale Hazard) is carelessness or indifference
to a loss, which increases the frequency or severity of a loss
(leaving keys in an unlocked car)
 Legal Hazard refers to characteristics of the legal system or
regulatory environment that increase the chance of loss (large
damage awards in liability lawsuits)
CLASSIFICATION OF RISK
 Pure and Speculative Risk
 A pure risk is one in which there are only the
possibilities of loss or no loss (earthquake)
 A speculative risk is one in which both profit or loss
are possible (gambling)
DIVERSIFIABLE RISK AND NONDIVERSIFIABLE
RISK
 A diversifiable risk affects only individuals or small
groups (car theft). It is also called nonsystematic or
particular risk.
 A nondiversifiable risk affects the entire economy or
large numbers of persons or groups within the economy
(hurricane). It is also called systematic risk or
fundamental risk.
 Government assistance may be necessary to insure
nondiversifiable risks.
CLASSIFICATION OF RISK
 Enterprise risk encompasses all major risks faced
by a business firm, which include: pure risk,
speculative risk, strategic risk, operational risk,
and financial risk
 Financial Risk refers to the uncertainty of loss
because of adverse changes in commodity
prices, interest rates, foreign exchange rates, and
the value of money.
ENTERPRISE RISK MANAGEMENT
 Enterprise Risk Management combines into a
single unified treatment program all major risks
faced by the firm:
 Pure risk
 Speculative risk
 Strategic risk
 Operational risk
 Financial risk
MAJOR PERSONAL RISKS AND
COMMERCIAL RISKS
 Personal risks involve the possibility of a loss or
reduction in income, extra expenses or depletion of
financial assets:
 Premature death of family head

Lost of a human life

Incurred of additional expenses

Unsettled additional expenses

Non economics cost
 Insufficient income during retirement

Most workers are not saving enough for a comfortable retirement
 Poor health (catastrophic medical bills and loss of earned income)
 Involuntary unemployment
MAJOR PERSONAL RISKS AND
COMMERCIAL RISKS
 Property risks involve the possibility of losses associated with the
destruction or theft of property:
 Physical damage to home and personal property from fire, tornado,
vandalism, or other causes
 Direct loss vs. indirect loss
 A direct loss is a financial loss that results from the physical damage,
destruction, or theft of the property, such as fire damage to a home
 An indirect loss results indirectly from the occurrence of a direct
physical damage or theft loss, such as the additional living expenses
after a fire to a home. These additional expenses would be a
consequential loss.
MAJOR PERSONAL RISKS AND
COMMERCIAL RISKS
 Liability risks involve the possibility of being held liable for
bodily injury or property damage to someone else
 There is no maximum upper limit with respect to the
amount of the loss
 A lien can be placed on your income and financial assets
 Defense costs can be enormous
MAJOR PERSONAL RISKS AND
COMMERCIAL RISKS
 Commercial Risks
 Firms face a variety of pure risks that can have serious financial
consequences if a loss occurs:
 Property risks, such as damage to buildings, furniture and office
equipment
 Liability risks, such as suits for defective products, pollution of the
environment, and sexual harassment
 Loss of business income, when the firm must shut down for some
time after a physical damage loss
 Other risks to firms include crime exposures, human resource
exposures, foreign loss exposures, intangible property exposures,
and government exposures
BURDEN OF RISK ON SOCIETY
 The presence of risk results in three major burdens on society:
 In the absence of insurance, individuals would have to
maintain large emergency funds
 The risk of a liability lawsuit may discourage innovation,
depriving society of certain goods and services
 Risk causes worry and fear
TECHNIQUES FOR MANAGING
RISK
 There are five major methods for managing risk
 Avoidance
 Loss control

Loss prevention refers to activities to reduce the frequency of
losses
 Safe driving course, stop smoking/healthy diet, periodic
inspection, strict security

Loss reduction refers to activities to reduce the severity of losses
 Fire sprinkle system, application of fire resistant material, `
TECHNIQUES FOR MANAGING
RISK
 Retention

An individual or firm retains all or part of a given risk

Active retention means that an individual is consciously aware of
the risk and deliberately plans to retain all or part of it

Passive retention means risks may be unknowingly retained
because of ignorance, indifference, or laziness

Self Insurance is a special form of planned retention by which part
or all of a given loss exposure is retained by the firm
TECHNIQUES FOR MANAGING
RISK
 Noninsurance transfers
 A risk may be transferred to another party by several methods:
 A transfer of risk by contract, such as through a service contract or
a hold-harmless clause in a contract
 Hedging is a technique for transferring the risk of unfavorable price
fluctuations to a speculator by purchasing and selling futures
contracts on an organized exchange
 Incorporation of a business firm transfers to the creditors the risk
of having insufficient assets to pay business debts
 Insurance
 For most people, insurance is the most practical method for
handling a major risk
DEFINITION OF SHIP

A large vessel that floats on water

Generally distinguished from boats based on size

May be found on lakes, seas, and rivers and they
allow for a variety of activities

An integral part of modern commercial and military
systems
WHAT IS SHIPPING?
THE REALITY OF SHIPPING TODAY
1.
The prime method of carrying commodities
2.
The most environmentally friendly means of transport
3.
It is essentially safe
4.
The cheapest and most cost-effective means of transport
for other than high-value
Shipping Lines, Shipping
Agents
Hauliers, Freight Forwarders,
Forwarding Agent
Port Authority, Customs and
other government agents
Port Klang Community System
Warehouse, Depot,
Distriparks
Other port users, overseas
customers, public, students
Shippers/ Consignee
23
Purchase
Order
Retailer /
Importer
Delivery
Confirm
Order
Status
Cargo
Received
Booking
Received
Destinatio
n Port
Stock
report –
in
Transit
Vendor /
Supplier
FCL &
LCL Pack
Arrival
at POD
Customs
Cleared
Shipped
on Board
Stock report – in Transit
Origin
Port
Documents
Dispached
24
SHIPPING AND THE GLOBAL ECONOMY

Shipping is the only really cost-effective method of bulk
transport over any great distance

More than 90 per cent of global trade is carried by sea.

United Nations Conference on Trade and
Development (UNCTAD) estimates that the operation of
merchant ships contributes about US$380 billion in
freight rates within the global economy, equivalent to
about 5% of total world trade
Figure 2.6 World Economy Correlate with Seaborne Volume
World GDP
Seaborne Trade Volume
7%
World GDP
World GDP
6%
Seaborne Trade
5%
4%
3%
2%
Crisis decreases demand
Growth of seaborne trade
1%
Seaborne
Trade (left
axis)
0%
-1%
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
1973
1st Oil
Crisis
1979
2nd Oil
Crisis
1991
Financial
Crisis
1997
Asia
Crisis
2001
Dot.com
Crisis
2007
Sub-prime
Crisis
Source: UNCTAD Trade Development Report 2008, UNCTAD Review of Maritime
Transport and China Shipbuilding Economy Research Centre (CSERC) 2008.
17/10/12
FURTHER DISCUSSION
 Discuss list of potential risks that
might be faced by the shippers

Man Overboard
 Fire
 Flooding
 Abandon Ship
 Injury and Illness
 Steering Failure
 Grounding
 Collision
TECHNIQUES FOR MANAGING
RISK IN SHIPPING
 There are five major methods for managing risk
 Avoidance
 Loss control

Loss prevention refers to activities to reduce the frequency of
losses
 Attending STCW course, marking and put precaution reminder
around dangerous area, applying ISPS code for inspection,
strict security, wearing PPE in dangerous area.
Loss reduction refers to activities to reduce the severity of
losses
Fire sprinkle system, application of fire resistant material,
oil spillage response
TECHNIQUES FOR MANAGING
RISK
 Retention

An individual or firm retains all or part of a given risk

Active retention means the ship owner is consciously aware of
the risk and deliberately plans to retain all or part of it

Passive retention means risks may be unknowingly retained
because of ignorance, indifference, or laziness

Self Insurance is a special form of planned retention by which part
or all of a given loss exposure is retained by the firm
TECHNIQUES FOR MANAGING
RISK
 Noninsurance transfers
 A risk may be transferred to another party by several methods:
 A transfer of risk by contract, such as through a service contract or
a hold-harmless clause in a contract
 Hedging is a technique for transferring the risk of unfavorable price
fluctuations to a speculator by purchasing and selling futures
contracts on an organized exchange
 Incorporation of a business firm will use credit transfer in order to
transfers to the creditors the risk of having insufficient assets to pay
business debts
 Insurance
 For most people, insurance is the most practical method for handling a
major risk. Eg; Marine Cargo Insurance, P&I, Hull & Machinery
INTERNATIONAL MARITIME ORGANIZATION
(IMO) & RISK MANAGEMENT
As a specialized agency of the United Nations, IMO is the global standard-setting
authority for the safety, security and environmental performance of international
shipping.
 Its main role is to create a regulatory framework for the shipping industry
that is fair and effective, universally adopted and universally
implemented. In other words, its role is to create a level playing-field so that
ship operators cannot address their financial issues by simply cutting corners
and compromising on safety, security and environmental performance. This
approach also encourages innovation and efficiency.
 Shipping is a truly international industry, and it can only operate effectively if
the regulations and standards are themselves agreed, adopted and
implemented on an international basis. And IMO is the forum at which this
process takes place. The world relies on a safe, secure and efficient
international shipping industry – and this is provided by the regulatory
framework developed and maintained by IMO.
 IMO measures cover all aspects of international shipping – including ship
design, construction, equipment, manning, operation and disposal – to
ensure that this vital sector for remains safe, environmentally sound, energy
efficient and secure.
 Shipping is an essential component of any programme for future sustainable
economic growth. Through IMO, the Organization’s Member States, civil
society and the shipping industry are already working together to ensure a
continued and strengthened contribution towards a green economy and
growth in a sustainable manner. The promotion of sustainable shipping and
sustainable maritime development is one of the major priorities of IMO in the
coming years.
 Energy efficiency, new technology and innovation, maritime education and
training, maritime security, maritime traffic management and the development
of the maritime infrastructure: the development and implementation, through
IMO, of global standards covering these and other issues will underpin IMO's
commitment to provide the institutional framework necessary for a green and
sustainable global maritime transportation system.
Most important IMO Conventions
 International Convention for the Safety of Life at Sea
(SOLAS), 1974, as amended
 International Convention for the Prevention of Pollution from
Ships, 1973, as modified by the Protocol of 1978 relating
thereto and by the Protocol of 1997( MARPOL)
 International Convention on Standards of Training,
Certification and Watchkeeping for Seafarers ( STCW ) as
amended, including the 1995 and 2010 Manila Amendments
PROVISIONS OF SOLAS 1974
 Technical provisions : standards for construction, equipment and operations of
ships
 General provisions : Concerning ship –surveys and documents relating to
compliance of conventions
 Construction - Subdivision and stability, machinery and electrical installations
 Fire protection, fire detection and fire extinction
 Life-saving appliances and arrangements
 Radio communications : incorporates the Global Maritime Distress and Safety
System (GMDSS).
 Safety of navigation
SAFETY OF LIFE AT SEA(SOLAS) 1974 …..
 Carriage of Cargoes
 Carriage of Dangerous Cargoes
 Nuclear ships
 Management for the Safe Operation of Ships
 Safety measures for high-speed craft
 Special measures to enhance maritime safety
 Special measures to enhance maritime security
 Additional safety measures for bulk carriers
PERSONAL PROTECTION
EQUIPMENT
 Personal
protective
equipment
(PPE)
refers
to
protective clothing, helmets, goggles, or other garments or equipment
designed to protect the wearer's body from injury or infection.
 The hazards addressed by protective equipment include physical,
electrical, heat, chemicals, biohazards, and airborne particulate
matter. Protective equipment may be worn for jobrelated occupational safety and health purposes, as well as
for sports and other recreational activities.
 "Protective clothing" is applied to traditional categories of clothing,
and "protective gear" applies to items such as pads, guards, shields,
or masks, and others.
 The purpose of personal protective equipment is to reduce employee
exposure to hazards when engineering and administrative controls
are not feasible or effective to reduce these risks to acceptable levels.
PPE is needed when there are hazards present. PPE has the serious
limitation that it does not eliminate the hazard at source and may
result in employees being exposed to the hazard if the equipment
fails.
 Any item of PPE imposes a barrier between the wearer/user and the
working environment. This can create additional strains on the
wearer; impair their ability to carry out their work and create
significant levels of discomfort. Any of these can discourage wearers
from using PPE correctly, therefore placing them at risk of injury, illhealth or, under extreme circumstances, death. Good ergonomic
design can help to minimise these barriers and can therefore help to
ensure safe and healthy working conditions through the correct use of
PPE.
 Personal protective equipment ranks last on the hierarchy of
controls, as the workers are regularly exposed to the hazard,
with a barrier of protection. The hierarchy of controls is important
in acknowledging that, while personal protective equipment has
tremendous utility, it is not the desired mechanism of control in
terms of worker safety.
INTERNATIONAL CONVENTION FOR THE
PREVENTION OF POLLUTION FROM SHIPS, 1973
(MARPOL)
 International Convention for the Prevention of
Pollution from Ships (MARPOL)
 Adoption: 1973 (Convention), 1978 (1978 Protocol),
1997 (Protocol - Annex VI);
 Entry into force: 2 October 1983 (Annexes I and II).
PROVISIONS OF MARPOL
1. Prevention of pollution by oil
2. Control of pollution by noxious liquid substance
3. Prevention of pollution by harmful substances carried by sea in
packaged form
4. Prevention of pollution by sewage from ships
5. Prevention of pollution by garbage from ship
6. Prevention of air pollution from ships
STCW
 International Convention on Standards of Training,
Certification and Watch keeping for Seafarers (STCW)
 Adoption: 7 July 1978; Entry into force: 28 April 1984;
Major revisions in 1995 and 2010
STCW
 The 1978 STCW Convention was the first to establish basic
requirements on training, certification and watchkeeping
for seafarers on an international level.
 Previously the standards of training, certification and
watch keeping of officers and ratings were established by
individual governments, usually without reference to
practices in other countries. As a result standards and
procedures varied widely, even though shipping is the most
international of all industries.
 The Convention prescribes minimum standards relating to
training, certification and watch keeping for seafarers
which countries are obliged to meet or exceed.
STCW
 The 1995 amendments entered into force on 1 February
1997. One of the major features of the revision was the
division of the technical annex into regulations,
divided into Chapters as before, and a new STCW
Code, to which many technical regulations were
transferred. Part A of the Code is mandatory while
Part B is recommended.
STCW
 STCW Convention chapters
 Chapter I: General provisions
 Chapter II: Master and deck department
Chapter III: Engine department
Chapter IV: Radio communication and radio personnel
Chapter V: Special training requirements for personnel
on certain types of ships
Chapter VI: Emergency, occupational safety, medical
care and survival functions
Chapter VII: Alternative certification
Chapter VIII: Watch keeping
STCW

The regulations contained in the Convention are supported by sections in
the STCW Code.
 Generally speaking, the Convention contains basic requirements which
are then enlarged upon and explained in the Code.
 Part A of the Code is mandatory. The minimum standards of competence
required for seagoing personnel are given in detail in a series of tables.
 Part B of the Code contains recommended guidance which is intended to
help Parties implement the Convention. The measures suggested are not
mandatory and the examples given are only intended to illustrate how
certain Convention requirements may be complied with.
 The recommendations in general represent an approach that has been
harmonized by discussions within IMO and consultation with other
international organizations.
THE INTERNATIONAL SHIP AND PORT
FACILITY SECURITY CODE (ISPS CODE) ISPS
CODE
 The International Ship and Port Facility Security Code (ISPS Code)
is a comprehensive set of measures to enhance the security of ships
and port facilities, developed in response to the perceived threats to
ships and port facilities in the wake of the 9/11 attacks in the United
States.
 The ISPS Code is implemented through chapter XI-2 Special
measures to enhance maritime security in the International
Convention for the Safety of Life at Sea (SOLAS), 1974. The Code
has two parts, one mandatory and one recommendatory.
ISPS Code
 In essence, the Code takes the approach that ensuring the security
of ships and port facilities is a risk management activity and
that, to determine what security measures are appropriate, an
assessment of the risks must be made in each particular case.
 The purpose of the Code is to provide a standardized, consistent
framework for evaluating risk, enabling Governments to offset
changes in threat with changes in vulnerability for ships and
port facilities through determination of appropriate security
levels and corresponding security measures.
 The security measures must be scalable to provide protection at
three security levels. The major elements of these requirements
are:
 Designating facility, ship and company security officers
 Conducting ship and facility security assessments
 Developing ship and facility security plans
 Providing security training commensurate with job function
 Instituting access control
 Designating restricted areas
 Implementing facility/ ship interface
 Conducting security monitoring
THREE (3) LEVELS OF SECURITY
RISK
 Security level 1: normal, the level at which the ship or port facility normally operates. Security
level 1 means the level for which minimum appropriate protective security measures
shall be maintained at all times.
Security level 2: heightened, the level applying for as long as there is a heightened risk of a
security incident. Security level 2 means the level for which appropriate additional
protective security measures shall be maintained for a period of time as a result of
heightened risk of a security incident.
Security level 3: exceptional, the level applying for the period of time when there is the
probable or imminent risk of a security incident.
Security level 3 means the level for which further specific protective security measures
shall be maintained for a limited period of time when a security incident is probable
or imminent, although it may not be possible to identify the specific target.