Karachi Insurance Institute Risk Engineering & Risk Management

1. 26 January 2010 Karachi Insurance Institute Risk Engineering & Risk Management Ian Roy

2. Risk Management • Risk Management - Definition • The identification, analysis and economic control of those risks that can threaten the assets or earning capacity of the organisation. • Why manage risk? • Risks impact company goals and threaten future viability • “...only by effective evaluation and assessment of risk can we hope to understand and manage the current and future challenges facing our company” - CEO, Major Energy Company

3. Risk ManagementQuestions to be answered • Where do the risks come from? • How big are they? • What are the major contributors? • What are the risks sensitive to, and how can they be changed? • What level of risk does the company find intolerable, what is considered trivial? • What is it worth doing to reduce the risk ?

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

5. Implementation Training, Supervision, Selection, Manning InterpretationProcedures, Methods, JobDescription, Responsibility Measurement Audit, Monitoring, Sampling, Inspection, Checking, Identification Policy Making Policy Statements, Corporate Goals, Standards Feedback Analysis, Trends, Evaluation, Actions External Influence Laws, Industry Standards, Stake Holder Pressure, Public Concern, Company Image The Risk Management Cycle

6. Alternatives for Risk • Accept • Knowingly: Identify, Evaluate and Accept • Unwittingly • Reduce • Requires prior identification • Avoid • Modification of system • Modification of lifestyle • Spread • Joint ownership • Multiple Facilities • Transfer • Insurance

7. Risk Identification and EvaluationA Risk Engineer’s Approach We will cover: • Risk Identification • Risk Evaluation • Underwriting Factors

8. Risk Identification • Types of Risk • Types of Loss • Causes of Loss • Examples

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

12. Hazards Fire Explosion VCE BLEVE Detonation Pollution Flood Earthquake Toxic Release Breakdown Insurance Cover Property Damage Business Interruption Machinery Breakdown Liability Loss Potential Types of Risk – Loss Potential

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

14. “Many accidents happen as a result of a breakdown in management systems” Underlying Causes of Loss

15. How are Specific Risks Identified ? • Knowledge and experience of industry • Knowledge and experience of specific processes • Discussions with management and personnel • Tour of installations More detailed techniques are available as required e.g. What-If, HazOp, Quantitative Risk Assessment

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

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

18. Risk Evaluation – Risk Matrices

19. Risk Evaluation – Property Damage • Usually referred to as Estimated Maximum Loss (or EML) • For refineries and petrochemical plants the EML scenario is usually a vapour cloud explosion • For other plants (or for some locations) it could be: • Jet fire • Tank fire • Vessel disintegration • Natural perils

20. Property Damage – VCE Evaluation • Critical factors that affect the magnitude of the VCE EML are • Structure congestion and confinement • Type of hydrocarbon • Volume of vapour cloud • Volume of structure • Asset value concentration • Secondary events • Results are dependent on quality of site data • Different companies use different methods e.g. TNT equivalent • It is not an exact science, there are many assumptions • However, SLAM method shows reasonable correlation with actual incidents

22. 0 1000 m Congested Area

23. VCE Evaluation • Damage estimate should be adjusted to reflect • Inflation over insurance and reconstruction period • Fire fighting expenses • Debris removal • Investigations • Other miscellaneous costs • All depend on policy wording and basis of values

24. Risk Evaluation – Business Interruption • Usually based on Property Damage EML scenarios • Sometimes a BI EML scenario does not correspond to a PD EML scenario • Requires detailed understanding of unit interdependencies and economics • Consider Customer / Supplier Extensions

25. Risk Evaluation – Machinery Breakdown • Identify critical equipment for process including utilities (rotating e.g. compressors and static e.g. reactors) • Need to consider potential BI impact

26. Risk Evaluation – Liability • Difficult to quantify - only limited to the imagination • Requires knowledge of neighbouring businesses and residences • Depends on separation from neighbours • Depends on interaction with third parties, e.g. • Contractors • Customers / suppliers • Partner companies (joint ventures) • Hold harmless agreements

27. Frequency / Probability • How to identify the likelihood of an event occurring • Various methods • Quantitative Risk Assessment (QRA) • Benchmarking • Qualitative Risk Ranking is used by Marsh • Hardware features • Software (Management systems) • Emergency Control

28. Location Climate Layout Physical features Utilities reliability Tankage LPG, atmospheric, refrigerated Process Units Equipment layout Fireproofing Drainage / kerbing Control room Process controls Combustion safeguards Remote isolation Depressurisation Inventory minimisation Qualitative Risk Ranking – Hardware

29. Good separation

30. Congested Layout

31. Open Layout

32. Fixed Protection and Sloping Floor

33. Qualitative Risk Ranking: Software Software Features CorporatePolicies People Systems CorporatePolicies EngineeringStandards Modifications Operations Maintenance Inspection Safety

34. Detection Response Control Flammable Gas DetectionFire Detection CommunicationsEmergency Plans Fixed Fire ProtectionMobile Fire ProtectionFire Water SystemsFire Fighting ServiceMutual AidOther Emergency Services Qualitative Risk Ranking Emergency Control

35. Qualitative Risk Ranking • Achieved by: • Detailed survey of installation • Discussions with management and site personnel • Audit of procedures and compliance checks • Comparison with Marsh risk ranking based on world-wide experience • Key benefits: • Useful as broking tool • Appraises weaknesses and strengths on a world-wide scale • Gives independent viewpoint • Provides basis for risk reduction programme

36. Overall Risk Benchmarking Summary Risk Quality Well above average Hardware Better than average Software Better than average EmergencyResponse Overall - Better than average OverallScore Excellent Average Basic Good Poor

37. Risk Control and Improvement • All serious risks should be addressed, i.e. eliminated or controlled by management • Risk Engineering survey develops Risk Improvement Recommendations, which when implemented lead to improved quality and control of risk • This will provide: • Reduction in (un)insured losses • Improvement in corporate image • Favourable premium negotiation • Reduction in “total cost of risk”

38. Underwriting Factors • Hardware / Software / Emergency Control Rating • Improvement • Exposure • Estimated Maximum Loss • Property Damage / Machinery Breakdown / Business Interruption / Operators Extra Expense • Scope of cover • Loss history • Basis of sum insured • Indemnity, re-instatement, actual • Retention • Deductible, loss limit, waiting period

39. Risk Identification and Evaluation • Conclusions • Requires knowledge and understanding of operations • Achieved by site and management audit • Qualitative analysis of exposures and quantitative consequence assessments • More detailed alternatives available • Provides basis for risk control programme • Enables structuring and placing of risk financing strategy

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