The document discusses risk management and provides definitions and classifications of risk. It describes how insurers are seriously concerned with risk management due to the large liabilities they assume through insurance products. It defines risk and discusses different types of risks such as physical risks, social risks, pure risks, and dynamic risks. It also discusses different approaches to risk management, including traditional, integrated, and enterprise approaches.

1. Risk Management A. S. Chaubal

2. Risk & Risk Management Why Pick on Insurers ?

5. Risk & Uncertainity : Risks : Those for which the probability of occurrence can be calculated either on a rational basis or on the basis of the statistical analysis of a number of similar events that have occurred in the past.

6. Uncertainity : Those for which analysis is impossible by virtue of the fact that they are either a “one-off” event or because their occurrence does not follow an apparent pattern of events.

7. Risk is, therefore defined as the variation in the outcomes that occur over a specified period in a given situation. The Probability of Occurrence is measured in the range of Zero to One. ‘ Zero’ indicates state of intrinsic impossibility & ‘ One’ indicates state of absolute certainity.

9. Risk is something or some happening that can cause harm or loss. But risk is not always loss causing and some Risks may cause both loss and gain ( usually to different people as with the extra work a repairer gets after a bad Storm or Flood).

10. Behaviour of those involved is also an equally important factor as the physical circumstances. There are many aspects of human behaviour which directly influence the outcome of a risk situation.

11. Companies are also subject to changes in social, political and economical factors. Modern economies are highly interdependent and changes in one section of economy may change the risk situation for other sections.

12. Risks can be of different types : Physical, causing direct harm or damage, or Social, causing loss of reputation or damage to self esteem. In simple terms Risk can be expressed for a business as uncertainty that will not allow the business targets to be achieved and the degree of the effects on targets will depend upon the degree of risk.

13. The Risk Iceberg … Risks that are clearly visible and quantifiable are relatively easier to manage

14. Risk Classification : Personal: Potential loss to the persons Property: Potential loss to the property Liability : Potential liability for any individual or institution. 1. Personal, Property or Liability Risk

15. Market : The price reduction or the purchase and sale constraints are involved. Social : Riot, Strike, Civil Commotion, Burglary, Theft etc. Physical : Storm, Tempest, Flood, Hurricane and such other natural phenomena. 2. Physical, Social or Market Risk

16. Pure Risk: is considered in the context of the existence of a chance of loss only, but not the chance of gain at all. Speculative Risk: When there is a chance of gain as well a chance of loss. 3. Pure or Speculative Risk

17. Static Risk: Which are connected with losses caused by the irregular action of the forces of the nature or the mistakes and misdeeds of human beings. Dyanamic Risk: Which are associated with changes in human wants and improvements in Machinery or Technological innovations . 4. Static or Dynamic Risk

18. Fundamental Risk: Risks associated with groups, impersonal in original and effect. These fundamental risks are in the form of Political or Economic changes happening to a group. Particular Risk: Which are associated with individuals. 5. Fundamental or Particular Risk

19. Fire,explosion,collapse Machinery breakdown Electrical/ electronic damage Negligence of employees Strike Transport accident Criminal acts Accidents Effects of fire or explosion from outside Lightning Environmental damage Criminal acts Political risks Insolvency of debtors Defective products Natural hazards Internal fire Explosion Impact of vechicles, falling aircraft Risk Threats Damage to property or health of third party

21. Financial Exch. Rate Credit Foreign Exch. Trading Market Negat. Eqty Counterparty Reputation Operational Fire/Expl M/C Brkdwn Computer/IT Contigency H S & E Theft Fraud SRCC BI Regulatory Legal Compliance Publ.Relation Contract Settlement Insurance RISKS

22. Management of Risks

24. A S CAT MAJOR MEDIUM MODERATE MINOR DEGREE OF RISKS A : INCIDENCE OF LOSS EVENTS S : SIZE OF LOSS IMPOSSIBLE TO ACHIEVE ANY TARGETS IMPOSSIBLE TO ACHIEVE SOME TARGETS PARTIAL EFFECTS ON TARGETS NO TARGETS AFFECTED BUT MODIFICATION NECESSARY NO EFFECT ON TARGETS

26. It’ll Never Happen to Me Risks – General Attitude

32. Risk Management : Essentially a Multi-disciplinary Process: Where Different Skills Are Brought Together in Risk Problem Solving.

33. Role of Risk Management Specialist

35. Having seen the Rationale for Risk Mgt & Targets against which Risk Management Performance Can be Measured, Let us Look at What is already Happening. An Industry may have many Specialists in the Areas of Manufacturing, Finance, Fire Fighting, Safety, Legal Control etc. However, priorities of Line Managers are much different & under considerable work pressure. =>

37. Risk Management Specialist must be capable of dealing with these shortcomings in a practical way without seriously disrupting the company’s operations or adding substantially to cost.

39. Managing Risks Three-Fold Approach

40. Risk Management Approaches Traditional Integreted Enterprise

41. Risk management Traditional Approach Risks Detection : Ad-hoc Dept.wise Measurement : Often not Done Finance : Separate Consideration : Not in Decision Making

42. Risk management Integrated Approach Risks Detection : Partially Integrated Across Depts. Measurement : Mostly Done but Co-relation & Concentration not examined Finance : Integrated Across Some Risks Consideration : I n Some Decisions but not Formally

43. Risk management Enterprise Approach Annual Comprehensive Risk Detection Including Scenario Planning, Total Risk Profile is Examined, Including Concentration & Co-relation between Risks, Risk financing is Integrated Across Depts. ( e.g. Integrated Financing of HAZARD & FINANCIAL Risks ) Risks Are Formally Incorporated into Strategic Planning, Performance Measurement & Pricing

44. Risk Management The Emerging Environment Strategic Risk Management Enterprise Risk Management

46. Enterprise Risk Management The discipline of systematically and comprehensively identifying, quantifying and addressing the collective impact of critical business risks to maximize shareholder value.

55. Risk Management is Simply a Practice Of Systematically Selecting Cost Effective Approaches for Minimising the Effect of Threat Realisation to the Organisation. All Risks can never be fully avoided or Mitigated simply because of Financial & Practical Limitations of the Real World. All Organisations have to Accept some level of Residual Risks which still may realise despite their Efforts.

57. Integrated Risk Management - aiming to reduce the total cost of risk. Multi-functional skills required to manage risks better Brokers well placed to manage risks as they possess multifunctional skills Risk Engineers Brokers / Underwriters Auditors Investment Bankers Financial Analysts Actuaries

59. Risk Analysis Chain Every Risk is Caused by Some Factor(s) & Result in Some Effect Cause Risk Effect

60. Is there a risk ? yes No Has it been measured? No yes Measure Significant? No Yes Can it be avoided or eliminated? Disregard Avoid/Eliminate Yes No Can it be Reduced? No Yes Yes Is residual risk significant? No Is it catastrophic? Disregard Yes Can it be retained? No Yes No TRANSFER Ignore Insure Others Ignore Interrelationship of Risk analysis, Risk control and Risk financing

61. Task of Risk Analysis must be carried out with Realism and Proper Perspective of Risks & Costs involved in Analysis.

65. What is a HAZOP? HAZOP is an abbreviated term for HAZ ard and OP erability study. Developed by ICI in1970 to Assess Effects of Deviations in Design Specifications. It is a technique that identifies the potential hazards and operating issues with the design and construction of equipment and plant and involves the interaction of a multi-disciplinary team.

70. When to Perform a HAZOP Traditionally, HAZOPs were incorporated in the design process of new facilities within the petrochemical industry. However, as employers take a more performance-based approach to safety, there has been significant interest in applying HAZOP as a Risk Management Tool for a diverse range of work situations, across an array of industries.

71. Simple HAZOP (HAZID) A simple HAZOP is conducted at the preliminary design stage prior to the development of detailed designs for a small-scale rig, experimental set-up or simple equipment. It does not outline detailed specifications and modifications but rather identifies key issues relating to the hazard and operability that need to be considered when developing the detailed designs.

72. Detailed HAZOP A detailed HAZOP is the full application of the HAZOP technique. It is conducted as the final check when the detailed design has been completed for more complex engineered plants or equipment. It analyses the plant as a whole and enables a detailed review of the reqd. specifications. A detailed HAZOP can also be conducted on an existing facility by reviewing the modifications required to be implemented.

74. Divide Sections into Study Lines Select a Study Line Apply all Appropriate Primary & Secondary Keyword Combinations. Any Hazards / Operating Problems Need More Info Record Consequences & Causes Suggest Remedies NO Yes Not Sure HAZOP Procedure Methodology

75. HAZOP Keywords An important feature of the HAZOP methodology is the use of keywords. (i) Primary Keywords (Parameters) Primary Keywords focus the attention upon a particular aspect of the design Intent or a process parameter / condition. FLOW, TEMPERATURE, PRESSURE, LEVEL, REACT, MIX, ISOLATE, DRAIN, INSPECT, MAINTAIN, START-UP, SHUTDOWN

76. (ii) Secondary Keywords (Guidewords) When Secondary Keywords are applied in conjunction with a Primary Keyword, potential deviation and problems are identified. HIGH, LOW, ZERO, EMPTY, REVERSE, ALSO, OTHER, TESTING, PLANT ITEMS, ELECTRICAL, COMPOSITION

77. Haz ard & Op erability Studies (HAZOP) A Process Flow Technique PLAN Select team, Examine System, Keywords TEAM System Assessment Team Activity REPORT Action List HAZOP report TRACK ACTIONS HAZOP Review meetings CLOSE OUT Record/file completed actions

78. Failure Mode and Effects Analysis ( FMEA/FMECA) This method was developed in the 1950s by reliability engineers to determine problems that could arise from malfunctions of military system. Failure mode and effects analys is a procedure by which each potential failure mode in a system is analysed to determine its effect on the system and to classify it according to its severity.

79. When the FMEA is extended by a Criticality analysis, the technique is then called Failure Mode And Effects Criticality Analysis (FMECA). Failure mode and effects analysis has gained wide acceptance by the aerospace and the military industries

82. Symbols Used in FTA : Transfer Point : To another Page or Analysis AND Gate : Failure occurs if ALL of the Input Event Occurs OR Gate : Failure occurs if ANY of the Input Event Occurs Cause : Events that Drive the Failure Event : Primary Or Intermediate Failure or Event

84. Fault Tree for Event – Fire Breaks Out

87. Cause – Consequence Analysis (CCA) This Technique Combines Cause Analysis (FTA) - deductive, & Consequence Analysis (ETA) – inductive. Purpose is to Identify Chain of Events that Can result in undesirable consequences Management Oversight Risk Tree (MORT) Primarily a FTA with Top Event as “ Damage, Destruction, Other Costs, Lost Production Or Reduced Credibility. The Tree gives an Overview of the causes of Top Event from Management Oversights & Omissions.

88. Safety Management Organisation Review Technique (SMORT) Simplified modification of MORT. This Analysis is structured by means of Analysis Levels with Check Lists while MORT is based on Tree Structure.

90. Case Study – FTA : Top Event Incorrect Patient Results Given To Physician Build FTA for This Event

92. Group Exercise

100. Risk Inspections

101. Place of inspections in Risk Management Process Predominant Place in * Risk Identification, * Risk Assessment, * Risk Control.

109. Inspections - Site Monitoring

110. Examination of & Discussions on Munich Re’s Risk Assement Questionnaire For Fire & Allied Perils

115. All risk control and financing measures cost money but some are more cost effective at minimising the total cost of risk than others. Risk control measures can be divided into : (a) eliminate or reduce the risk; (b) prevent loss i.e. the risk exists but no loss occurs; (c) detect and reduce the extent of the loss; (d) rehabilitate, restore and recover.

120. Education and Training : The Human Factor is never absent & hence education and training have a major role to play in loss reduction programmes and should cover everyone employed by or associated with the work of an organisation. Risk Reduction Risk avoidance Risk Spreading

123. Risk Retentions : Primarily based on the ability to afford financial Consequences and not based on inability to afford suitable cover. Monitoring the strategy : Final but most important step to keep the whole process going. Overall objective is to improve financial performance By helping to reduce expenditure and avoid potential loss situations.

124. Risk Management Application Analysis of Losses

125. Analysis of Worldwide Losses Over Last 25 Years Risk Management Application Refinery/Petrochemical Losses

135. Conclusions Less Incidents Bigger Loss per Incident. Half of Losses Occur at Refinery Sites. Losses Evenly Spread Between: Storage and Pipeline Equipt. Processing Plant. High Loss Frequency For: Furnaces/Heaters/Pipework/ Storage Tanks. Only Half of Losses During Normal Oprn.

137. Illustrative Case Studies on Risk Characteristics & Underwriting Criteria For Roads, Railways & Bridges

138. Next to Follow Risk Management Policy, Self Insurance & Captives, PML Role & significance.

139. THANK YOU