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Feature report "Rail risk - Stay on Track" | Aon NL
 

Feature report "Rail risk - Stay on Track" | Aon NL

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The international railway industry is enjoying a period of significant growth across the world. Europe's trans-continental mixture of state-owned and franchise operated networks continues its steady ...

The international railway industry is enjoying a period of significant growth across the world. Europe's trans-continental mixture of state-owned and franchise operated networks continues its steady march towards the introduction of newer, faster trains and tracks, supported by increasingly sophisticated signalling and safety systems.

Unfortunately, 2013 has witnessed some serious accidents, and while they are mercifully rare, these occurrences show that rail industry firms' operational risk mitigation measures cannot exclude the possibility of large incidents.

Aon Global Risk Consulting has carried out extensive studies, revealing trends around pertinent issues. It is our belief that with more information at hand, risk managers within the railway industries can support the long term strategic goals of their businesses and maintain a commitment to safety.

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    Feature report "Rail risk - Stay on Track" | Aon NL Feature report "Rail risk - Stay on Track" | Aon NL Document Transcript

    • Aon Hewitt | Xxxxxxx Rail risk – Stay on Track Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Risk. Reinsurance. Human Resources. Empower Results®
    • 2 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Contents Risk in the railway industry 6 A chain reaction - Lac-Mégantic 6 Typical exposures 7 Precursors - managing the causes of incidents 8 How good precursor analysis can pay 9 The importance of key risk indicators 10 A proactive risk management strategy 12 The role of risk finance and insurance 12 Insurers’ valuation of railway risks 12 Evaluate and quantify liability risks 13 Stay on track 14 Cementing partnerships with insurers 14 Contact 15
    • 3 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Introduction In recent years high fuel prices, congested airports and highways and tightening airport security rules have coalesced to make rail a much more attractive option for passengers and cargo. The international railway industry is enjoying a period of significant growth across the world and examples of grand infrastructure schemes are not difficult to find. President Barack Obama’s ‘Vision for High Speed Rail in America’ illustrates the growing acceptance of trains as a viable alternative to air travel, while of course China is virtually peerless, through its development of a country-wide network connecting the major cities and remotest regions of this vast nation with thousands of kilometres of track. Even Africa, for so long the continent whose fragmented, post colonial network seemed far too great a challenge for modernisation, has recently been granted a USD 500m1 investment from the African Development Bank to roll out projects in the East African Community covering Kenya, Tanzania, Uganda, Rwanda and Burundi. Meanwhile, Europe’s trans-continental mixture of state-owned and franchise operated networks; carriers and infrastructure continues its steady march towards the introduction of newer, faster trains and tracks, supported by increasingly sophisticated signalling and safety systems. Unfortunately, while rail travel remains second only to aviation for safety, 2013 has witnessed some serious accidents, resulting in tragic loss of life and in some cases significant financial impact – even bankruptcy – for those involved. While they are mercifully rare, these occurrences show that rail industry firms’ operational risk mitigation measures cannot exclude the possibility of large incidents causing injuries, fatalities, damage to property or punitive business interruption losses. With rail networks supporting ever increasing amounts of passenger and freight traffic, the stresses on equipment, infrastructure and personnel are rising exponentially. In addition, international boundaries are being crossed even more frequently and operators share congested networks. The latter trend is likely to increase given the commitment from regulators such as those in the European Community to promote greater competition2 among operators. “Aon Global Risk Consulting has accessed a range of important data sources, revealing trends around pertinent issues such as precursors to accidents and the need for greater use of key risk indicator models.” 1 The Central Corridor Transit Transport Facilitation Agency (TTFA). 2 European Commission fourth ‘Package’ of railway-related directives and regulations. It covers standards and authorisation for rolling stock; workforce skills; independent management of infrastructure; and the liberalisation of domestic passenger services – approved in January 2013, it was still awaiting European Parliamentary approval at time of going to press.
    • 4 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting During the process of compiling this report, Aon Global Risk Consulting has accessed a range of important data sources, revealing trends around pertinent issues such as precursors to accidents and the need for greater use of key risk indicator models to build resilience into rail industry companies’ operations. We have dissected many of those issues in this report and considered a number of key factors for risk managers within the international rail industries, to help them make the right decisions within their own operating environments. Aon Global Risk Consulting has also carried out extensive studies into the elements of rail companies’ total cost of risk and we are frequently engaged by companies to provide Liability Risk Quantification studies. Perhaps the single largest potential exposure facing the industry today, the need for companies to accurately calculate their potential liability in the context of risks from every day slips and trips to catastrophic claims has arguably, never been greater. It is our belief that with more information at their fingertips, risk managers within the railway industries can support the long term strategic goals of their businesses and maintain a commitment to safety which will foster growth and protect the bottom line, even in the most challenging circumstances.  
    • 5 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting
    • 6 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Risk in the railway industry 2013 has in some ways been a difficult year for the international rail industry. Several incidents have made headlines and reminded the public with sensational images in the media of just how devastating the consequences can be. Seven major incidents occurred within the space of three months, the causes and consequences of which differed substantially. The Swiss and Canadian incidents have been attributed to human error and the French crash caused by failing rail buckles. In Sochi (Russia), the accident was most likely the result of extreme weather conditions as higher than average temperatures may have caused the rails to bend. Meanwhile, Spain’s considerable record of achievement in the advancement of rail travel suffered a blow in 2013 after the Santiago de Compostella derailment caused the death of 74 people. Sadly, for one of the most modern railway networks in the world, the tragedy reminded industry and public just how delicate the balance of safety actually is, with human error the one variable still impossible to completely predict. A chain reaction – Lac-Mégantic Potential losses and liabilities following an incident can accumulate far beyond damage to first party property or equipment. The crash in Lac-Mégantic, Canada on 6th July 2013 provides a timely example of this type of aggregation, with a scenario involving fire and explosions in populated areas, volatile cargo and allegations of poor maintenance. An unattended 74-car freight train carrying crude oil travelled 11 km down a descending grade from Nantes to Lac- Mégantic and derailed, resulting in the fire and explosion of multiple tank cars. According to court documents, the resulting oil spill could cost more than USD 200m to clean up, while other evidence suggests that liability insurers may choose within the limits of their liability coverage to prioritize claims from victims, including the families of more than 40 people killed and many more injured, rather than contributing to environmental recovery costs. The railway operator Montreal, Maine and Atlantic Railway (MMA) filed for bankruptcy protection in both the US and Canada in August 2013 and had its Certificate of Fitness revoked after the company admitted being unable to raise the required insurance coverage. Railway incidents • December 9, 2013: Jakarta (Indonesia) • December 1, 2013: New York (USA) • July 30, 2013: Granges-près-Marnand (Switzerland) • July 24, 2013: Santiago de Compostella (Spain) • July 12, 2013: Brétigny-sur-Orge (France/Paris) • July 7, 2013: Sochi (Russia) • July 6, 2013: Lac-Mégantic (Canada) • May 9, 2013: Rostov (Russia) • May 4, 2013: Wetteren (Belgium) Likely insurance loss categories incurred by MMA • Freight • Infrastructure • Locomotives and wagons • Personal injury • Environmental damage • Business interruption • Damage to other railway operators • Damage to third parties (nearby industrial or residential areas) • Legal expenses
    • 7 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting The tragic case of Lac-Mégantic illustrates the importance of risk analysis for operators and providers of infrastructure. Insurers typically focus their underwriting attention on worst case scenarios, using 1/100 year, 1/50 year or other event timescales in order to ascertain how much capital they need to remain solvent should a catastrophic incident occur. Sadly, it appears MMA was unable to bridge that gap and build into its risk management model enough coverage to ensure its business would remain a going concern after such a significant and costly, incident3 . Typical exposures It is without question that these incidents are damaging to the public perception of rail travel and rail industry businesses have worked tirelessly to remind people that it remains by a substantial margin one of the safest methods of transportation. Growth in passenger numbers and freight of up to 60% between 1990 and 2010 suggests the argument is being won4 . This battle for hearts and minds is supported by considerable evidence. Safety on rail networks has enjoyed a substantial improvement over the past few decades. A reduction in the accident rate of ca. 6% per year has been achieved across Europe, resulting in a 70% fall in accidents between 1990 and 20125 . However, as rail operators and networks navigate new routes, or across international boundaries the risks they assume include a number of unique characteristics. For example, travelling between nation states can expose a carrier to environments where different safety systems are applicable and language barriers might cause problems. Also the variable levels of investment in railway infrastructure from central governments impact the quality of track or signalling. Alternatively, those countries’ systems of compensation for personal injury and the overall cost of property and liability often vary widely. For example; railway fatalities per million km are more than 10 times higher in Lithuania than they are in Spain, but the latter has by far the higher cost of liability owing to its average monthly wage being more than three times that of its Eastern European Counterpart. “Rail industry businesses have worked tirelessly to remind people that it remains by a substantial margin one of the safest methods of transportation.” Transport mode used by user Number of fatalities (2008 – 2010) Airline passenger 0.101 Railway passenger 0.156 Bus / coach occupant 0.433 Car occupant 4.450 Powered two-wheeler 52.593 Vessels passenger N/A Table 1 Fatality per 1bn passenger km 3 Canadian Transport Agency - Order No. 2013-R-266 4 Source – UK Department for Transport; Rail Trends Great Britain 2010/11 5 Intermediate report on the development of the railway safety in the EU (by European Railway Agency, ERA)
    • 8 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Nevertheless, liability costs are rising around the world as individuals’ asset values increase. A strong indicator of this can be found in levels of insurance penetration between countries. For example, Spain’s level of insurance penetration decreased between 2009-2010 as that country suffered a considerable slump in economic fortunes, while Lithuania’s rose6 . Precursors – managing the causes of incidents ‘Precursors’ is the catch-all phrase for factors which may or may not be identified as the primary causes of accidents. In the EU all precursors, independent of them resulting in an accident or not, are required to be reported. Of course, in most cases identified precursors don’t lead to major incidents, but according to the ERA7 around 2,400 significant accidents do occur each year within the member states of the European Union. Of those, 27% are caused at level-crossings, resulting in 359 fatalities and 327 serious injuries. The number of fatalities represents 28% of all fatalities on railway, excluding suicides. This contrasts with data from the Canadian rail authorities where only 17% of all rail accidents involved pedestrians or vehicles at rail crossings. In these accidents 29 people lost their lives. This incident rate in Canada is virtually unchanged since 2008 when safe interaction between railway operations and the public became the subject of numerous investigations and initiatives by Transport Safety Board of Canada. However, south of the border in the USA, level crossing incidents also include a further category known as ‘rail trespassers’; often pedestrians walk across or along railroad tracks as a shortcut and this leads to more than 500 trespass fatalities every year, and nearly as many injuries.8 Below you will find the number of fatalities at level crossings related to the number of inhabitants and population density. Nevertheless, the United States has demonstrated a marked improvement in accident numbers overall. Based on the data from the Federal Railroad Administration (FRA) the two main precursors in the US are human error and track failures. As a result of efforts to improve safety, accidents caused by human error have declined since 2004 by 55.2% while accidents caused by track failures have declined by 45.3%. 6 CEA Statistics #44 European Insurance in Figures December 2011 7 ERA: European Railway Association 8 Federal Railroad Administration Top-five predetermined precursors 1) Broken Rails 2) Signals passed at danger 3) Track buckle 4) Wrong side signal failures 5) Broken wheels and axles Source: European Railway Association Number of fatalities Number of inhabitants Population density at level crossings per year (inhabitants per km2) EU 359 506.8 million 116 CAN 29 33.4 million 3.73 USA > 500 316.7 million 32.9 Table 2: EU in comparison to the USA (2012 - 2013)
    • 9 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting How good precursor analysis can pay Initiatives such as those implemented by the FRA emphasise the importance of focusing on precursors as the causes of accidents; measuring their propensity to influence overall safety and then deploying tactics to reduce their effect. Aon Global Risk Consulting analyzed the ratio of precursors to accidents of six European countries. In 2011, there were a total of 1,155 accidents and 5,947 precursors reported in the six European Union countries on table 3. So what does this mean for safety management? The data in table 3 shows that overall, 29 % of all accidents in these six countries are due to causes related to precursors. In countries such as France and Spain the percentage is even higher; over 40%. Although this is a limited point of view it is an indicator of the potential of a good precursor analysis. By preventing precursors it is possible to prevent a significant portion of accidents in Europe and make a significant impact on the number of insurance claims made on a railway industry company’s account. The precursors vary per country. Poland, for instance, has a very high number of broken rails. This is likely to be the result of the age of railway infrastructure in Poland. Italy and Spain, on the other hand, have a remarkably high number of track buckle. This directly relates to the weather conditions in these southern countries. The climate is known to be one of the leading factures of track buckle. DE FR ES UK IT PL Total Total number of accidents 285 154 42 78 108 488 1155 Total accidents related to precursors 88 64 19 20 28 117 336 Percentage 31% 42% 45% 26% 26% 24% 29% Total number of precursors 952 889 471 414 1603 1618 5947 Table 3: relationship between precursors + total number of accidents
    • 10 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting The importance of key risk indicators In contrast to the highly influential role of Key Performance Indicators within the rail industry, Key Risk Indicator systems are underdeveloped, with safety and risk management arguably taking a post-loss, reactive approach in most circumstances. However, a number of models have been developed by industry stakeholders, aimed at determining areas of possible risk exposure before they materialise. These include the Safety Risk Model of the UK Railway Safety Board and the Common Safety Indicator Model of the European Railway Agency. Similar to KPIs, KRIs are also constructed in relation to relevant metrics, which help to identify potential areas of risk. Although KRIs are forward looking measures, researching past railway accidents and the causes of fatalities still play an important role in determining the most prominent safety issues in the railway industry. Thus, accident research is paramount in the construction of KRIs. Unfortunately, not every rail industry company is privy to the level of accident data available as those within the European Union and this lack of reliable and comparable data is an obstacle to effective KRI construction for some. Examples of KRI practices UK: Railway Management Maturity Model (RM3) & Safety Risk Model. Currently 80% of railway industry companies are aspiring towards a certification of ‘excellence’ in operational safety under RM3. Spain: Renfe Operada has implemented its own safety management system, with objectives approved and checked each year by the National Railway Safety Authority. Germany: The Eisenbahn-Bundesamt/EBA has an administrative tool called the VV EA STE, for setting standards in the supervision of railway signaling, telecommunications and electrical systems. Under this framework all data reported to the EBA is assessed in a databank to enable the identification of critical points of operations. The tool is then used for improving safety of bottlenecks throughout the German Network (Federal Railway Authority, 2011). Source: European Railway Association
    • 11 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting
    • 12 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting A proactive risk management strategy The role of risk finance and insurance With passengers, freight and third parties all requiring protection, questions around coverage are complex and multi-faceted. In Europe, differences exist with regards to which liabilities national legislation identifies and requires to be covered, with self-insurance a practice which is encouraged and discouraged in almost equal measure depending upon which country the company is in. Within the EU, the required insurance amount varies between EUR 10 million for Germany and the Netherlands up to GBP 155 million in the UK per loss event. The actual coverage taken out by rail industry companies can differ from the liability limits set by the national authorities of EU Member States. Besides national legislation, access agreements between railway infrastructure providers and railway operators often include requirements regarding insured limits. Often these agreements include an obligation for railway operators to insure themselves for a certain amount unless a risk analysis proves that a lower limit is sufficient. Lease companies (of trains and/or wagons) also make similar requirements. The most important considerations when ensuring appropriate levels of coverage are principally around the contractual framework of the policy. The insured party must set adequate limits on liability, clearly understand the cost of an accident involving multiple fatalities, severe injuries and other property damage. Within this calculation is the assessment of typical awards for bodily injury claims and the price of legal expenses. North America is probably the most extreme example with the existing compensation culture, high rewarded claims and expensive litigation for resolution. Insurers’ valuation of railway risks Companies are encouraged to provide as much relevant information on their risk as they can. If for example they have incurred major losses it will be their responsibility to explain the underlying cause and what is being done to prevent further occurrences. If national or state regulators have conducted investigations, this can act in the railway company’s favour. For example the roll out of the safety system TPWS (Train Protection and Warning System) on the UK network following the train crash at Ladbroke Grove in 1999 has had a significant impact on accident numbers. Another important safety system, initiated by the European Union, is the European Rail Traffic Management System (ERTMS). ERTMS is a standard for in-cab train control system which has also had an enormous impact on train accidents. Recently, in the US the Rail Safety Improvement Act 2008 and the Federal Railroad Administration rule of 2012 involving the implementation of Positive Train Control technology had a positive effect on the insurance market for rail operators. Due to these legislative packages an additional, excess insurance facility has been created by Aon, backed by the security of Loyd’s of London and other highly rated commercial markets. This development shows that improving the risk management measures can convince insurers of good insurable risk profiles among rail operators.
    • 13 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Evaluate and quantify liability risks Railway companies are facing an increasing need to identify the appropriate limits of liability and coverage tailored to their specific risk profile. Is the current limit sufficient, and in line with the real exposure, and does the coverage match? Aon answers these questions by providing railway companies with the necessary analytical and quantitative tools; Liability Risk Quantification (LRQ). Its objective is to identify, assess and quantify the impact of major liability risk scenarios. The detailed risk scenarios are also used in reviewing current liability policies, and identifying coverage gaps or sub-optimal programme construction. The LRQ methodology includes the following steps: After identifying the most critical risk areas specific scenarios are developed. These scenarios must be quantified. With this quantification the following loss components can be distinguished: • freight • infrastructure • locomotives and wagons • personal injury • environmental damage • business interruption • damage to other railway operators • damage to third parties (nearby industrial or residential areas) • legal expenses The loss components are aggregated into an estimate per scenario. Combined with the organisation’s risk appetite and risk bearing capacity, decisions can be made on: • financing liability scenarios • limits of liability insurance • strategic risk management decisions Identify risk areas Identify risk scenarios Scenario analysis Quantification scenarios Decision risk finance
    • 14 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Stay on track Cementing partnerships with insurers During the course of researching this paper, Aon Global Risk Consulting has been able to make use of best practices around the world. A generally improving picture for railway safety over recent decades offers numerous case studies on what processes and risk management tools have worked in order to make those networks a success. However, we have not delved too far into the role of state governments and regulators who undoubtedly play a key part in securing the future of the railway industry. Both departments of state and rail regulators occupy a deciding position not only through subsidy and infrastructure investment, but also in developing nationwide or global standards for safety and risk management which can then be replicated to ensure rail operators do business in an environment with fewer variables to mitigate. This has been illustrated well by the actions of various countries to promote safety management through analysis of accident precursors, rather than inspecting only the problem’s aftermath. Similarly, the increasing endorsement of Key Risk Indicators by national regulators should have a powerful effect on rail companies. Nevertheless, the industry can still be confronted by accidents that lead to significant claims. To ensure business continuity in the long term it is essential to analyse which risks the railway company is facing and what kind of impact is associated with them. Only then can the consequences of an incident and the potential financial impact be properly understood. The current risk bearing capacity and risk appetite of the organisation as well as the interests of the shareholders and very often the tax payer will also need to be included within the decision making process. Only with certainty can confidence be maintained so by partnering with expert risk advisors and brokers, rail industry companies can build a sustainable future, managing the risks of this complex and dynamic industry.
    • 15 | Liability risk management in the global rail industry A feature report by Aon Global Risk Consulting Contact Rick Decoster - United States E rick.decoster@aon.com T +14 042643007 M +13 14 5184 987 Bill Russell - United Kingdom E bill.russell@aon.co.uk T +44 20 7882 0745 M +44 777 9702 105 Jolande Waterschoot - Other countries E jolande.waterschoot@aon.nl T +31 10 448 7548 M +31 6 547 759 81 Jiska Wijker-Kerskes - Other countries E Jiska.Wijker@aon.nl T +31 10 448 7927 M +31 6 518 324 77 Jolande Waterschoot - The Netherlands Jolande Waterschoot is Managing Consultant Risk Management with Aon Global Risk Consulting in The Netherlands. She is responsible for Liability Risk Management and Scenario analysis and has extensive experience as an advisor in the field of risk management, in both the private and public sector. In the last decade Jolande has performed several Liability Risk Quantification studies for railway companies in Europe and Africa. Contractors were both infrastructure providers as well as passenger and freight operators. Jolande holds a Master Degree in Law of the Radboud University in Nijmegen. Jiska Wijker-Kerskes - The Netherlands Jiska Wijker-Kerskes is Consultant Risk Management with Aon Global Risk Consulting in The Nether- lands. In her role she has advised numerous organisations in both the private and public sector over the past years. Jiska has broad experience setting up risk profiles, implementing risk management systems and quantifying (liability) risks with organisations in mainly the public and semi-public sector (public transportation, municipalities and (partial) governmental organizations). Jiska holds a degree in Business Administration of the InHolland School for Higher Education in Rotterdam, several insurance certificates and is Associate Risk Management. Authors
    • 8220-Raiway-WP-V6 Februari 2014