Insurance as a Topic
in a Safety Management Program was never thought of
when we joined Insurance Industry about 20 years back.
Insurance used to be considered the area of interest
only to the Finance person looking after Insurance.
It is heartening to note the current awareness level.
Insurance is being now recognized as an essential topic
in most of such seminars.
Managing of risks has always been part of our daily
routine. Personal issues like managing self finance
portfolio, health care, planning for child's education
and managing risks in whichever business we are in comes
naturally to all of us.
Managing risks in Chemical Industry gains importance
because of nature of chemicals handled and magnitude
of material losses possible. Business Interruption losses
following the loss is now recognized as concern for
the industry. Further the risks associated with Public
liability exposure ,especially after Bhopal Gas tragedy
is now well known.
Safety has assumed great importance in view of the complexities
in technology in use today. While designing complex
plants and equipment, safety has to be incorporated
right at the planning and design stages. This can be
done by the selection of tested technologies and manufacturing
routes. When this is not possible, appropriate hazard
identification and assessment techniques should be used
to identify inherent hazards and assess their loss potentials.
This helps in arriving at a safe design through an alternative
manufacturing route or a reduced inventory of toxic
or flammable materials.
Risk Management is practiced by carrying out systematic
appraisal of plant or operations. This systematic appraisal
is of immense use at all stages in the life cycle of
This life cycle is summarised as below :
OF AN INSTALLATION
||Includes strategy, research &
development and process selection
||Layout of installation and broad
equipment specification agreed
||Preparation of engineering drawings
and detailed specification for equipments fabrication,
purchasing and operation
||Erection, checking, testing and
introducing feed stock Commissioning
||Including periodic shut down
for maintenance, modifications or for operational
|Final Shut down
|| Operations terminated and plant
dismantled for disposal
This systematic appraisal of quantifying risk
consists of four sequential steps as under :-
- Identification of Risk
- Evaluation of Risk
- Handling of Risks
- Implementation of Programme
Identification and Evaluation
are often combined together and described as risk assessment.
Failure to assess the risk adequately may result in
its retention by the plant owner. There are many instances
where inadequate risk assessment has led to disastrous
consequences for the corporate bodies.
Risk assessment is the systematic examination of an
actual or proposed chemical plant installation to identify
potentially hazardous occurrences and their possible
consequences. Its principal purpose is to assist decision
making on risk avoidance or risk reduction measures
although in certain cases risk assessment may be used
in making decisions on location of a proposed installation.
An Analysis of 460 major losses in chemical industries
according to 10 hazard factors is illustrated here :
OF AN INSTALLATION
of Times Assigned
|Inadequate Material Evaluation
|Chemical Process Problems
|Ineffective Loss Prevention Measures
|Material Movement Problems
|Plant Site Problems
|Structures not in conformity
|Inadequate Plant Layout and Spacing
Equipment failure and inadequate material evaluation
accounts for 51 percent of total losses. The human factor
is responsible for nearly 17.2 percent of the losses.
The concept of fire loss prevention should originate
from the inception of the plant and then carried to
the drawing board to its construction and operation
and to merge imperceptibly into process arrangements.
It is more important that the guiding principles must
also embrace the frequent modifications and changes
in building, storage, equipment, process arrangements
Process of Risk Management
The process of Risk Management consists of the certain
This is the first step (often combined with analysis)
in the process. It implies a complete inventory of all
possibilities of loss from fortuitous sources and is
normally a gradual process. Recorded, therefore, will
be details of risks in areas such as tangible and intangible
sources of direct and indirect earnings, exposures to
product liability which can be imposed by common law
All of the exposures identified must be analysed with
particular reference to the financial risk presented
to the organisation. The Risk Manager will need to ask
questions such as
- How frequently will a loss occur
- How severe will the loss be ?
- What are the probabilities of
a total loss from a single occurrence ?
All of the implications
of every possibility will need to be analyzed in depth
to identify the ramifications of a potential incident.
Proper housekeeping and the introduction of protective
devises are standard techniques of risk reduction. Also
commonly used are techniques such as quality control,
frequent inspections, maintenance of equipment and effective
Preventive maintenance is an essential area of study
as the potential for risk control and risk reduction
in this are is most significant.
When all the likely exposures have been identified and
analyzed, the of the organization risk mangers can evaluate
each risk in the light of the philosophy of the organization
and indeed also its financial capacity. Selection of
the appropriate combination of risk management techniques
for the treatment of each loss exposure is basically
a financial decision. The organisation invests some
of its funds in risk management techniques, receiving
in return, benefits such as security of operations,
reduction in actual losses and reduction in the cost
of these losses.
It is not considered a sound practice to place undue
emphasis on those losses where the potential is too
small to affect the financial stability of the firm
or where the loss exposures are so consistently stable
and so related to the firm's operations that it can
be considered as a normal part of doing business. These
expected losses should be predicted as accurately as
possible and then budgeted.
Risk control is at the heart of risk management and
therefore those aspects of controlling risk that is
the responsibility of the risk manger constitute a field
that has far too many facets to be even touched on here.
It would suffice it to say that he should be planning
activities on the basis of pre-event and post-event
stages of those losses which may have significant financial
impact upon the firm and have an awareness of the control
measures that can be adopted as part of the direct responsibilities
of a Risk Manager.
To pay for the losses, an organization must rely on
either internally generated funds (risk retention) or
funds from outside source (risk transfer). Transfer
is most commonly achieved through purchasing insurance.
The key risk management questions are whether or not
to purchase insurance, whether to purchase full coverage
and with whom to insure.
One of the important decisions in the risk management
process is to establish what risk or part of the risk
can be retained by the organization, together with those
where outside financing must be employed.
Once the risk manger has systematically followed the
steps in the risk management process to this stage than
there is little choice but to transfer the financial
aspects of the remaining risks to someone else. The
first attempts at risk transfer usually involve non-insurance
means. However, the purchase of a good insurance cover
is the most important means of risk transfer, although
it will not normally make a positive contribution to
profitability. Insurance is a more expensive financing
alternative than risk retention.
The chemical industry
Chemical plants are greatly diversified in kind, complexity
and importance, dealing with millions of tons of raw
materials and products which are inherently hazardous
and employ processes with high temperature and pressure.
Losses from Fire and Explosion in chemical industries,
are prevalent more than in any other industry. Also
the average loss per fire is the largest for any industry.
The value of equipment and materials accounts for the
unusually high monetary loss. Such loss value does not
reflect the tremendous and incalculable indirect losses,
such as production time and customer losses, impaired
competitive position, delay in rebuilding, replacement
of imported equipments and parts, key personnel, lack
of confidence by operatives and public. These are inevitably
associated with any interruption of operation caused
by a large fire or a destructive explosion.
Over one million different organic compounds and about
40,000 inorganic products are produced in chemical plants
today. About another three million chemicals are listed.
The possibilities of reaction of chemicals are infinite.
Anyone of these in combination with another has reaction
possibilities. Three or four together can create rapid
and autocatalytic decomposition or other forces for
reaction and instability. The available information
on hazardous chemicals give information roughly on 4000
chemicals being hazardous and 2900 as highly hazardous.
Little wonder that there are so many fire losses associated
with the operations of chemical plants.
A risk is a "hazard, chance of bad consequences
or loss or exposure to mischance." Exposure to
hazard or loss is obviously an important element in
risk just as the concept of uncertainty, the contingent
element of risk.
Risk must be related primarily to an uncertainty. For
a business, this uncertainty will relate to future earnings
and cash flow, also to assets owned presently and acquired
in the future. If there is no uncertainty, there is
no risk. Uncertainty could be expressed in forms of
variability or potential variability of earnings, cash
flow and assets.
The variability can be unfavourable or favourable with
a negative or positive effect on earnings and cash flow.
Some instances of uncertainty and variability are:
- Fire: Reduction
of assets and / or earnings
- Political Risk:
Largely a matter of government intervention, perhaps
by acquisition or confiscation. The governments'
financial policy can seriously affect earnings as
with levies and grants. Social pressure is a form
of political risk for instance, public opinion might
force closure of a factory.
- Technical Risk:
Will performance expectations be met? A new process
might not be ready on time or it could yield higher
- Marketing risk:
Will potential customers want the product? Could
it be made obsolete by changes in taste, location,
- Labour risk:
Will difficulty be experienced in staffing? Are
we vulnerable to staff dissatisfaction?
- Third party & other
liability risk: One event can alter fortunes
considerably, liability risks are utterly capricious
- the exposure is unrelated to the value of the
assets or earnings.
The range of uncertainty
is great and may of the aspects interrelate. For instance,
a riot situation is not only a danger in itself but
by reducing the effectiveness of fire prevention measures,
it increases the risk of accidental fire.
The basic risk problem in business is to protect earnings,
cash flow and assets. This necessitates analysis of
the potential risk, determining as far as possible its
probable and possible extent and taking steps to control
the risk. If we cannot economically control the risk
our problem becomes one of the risk financing, or ensuring
that sufficient funds are available to meet the post
loss situation in terms of depletion of assets, cash
flow and earnings.
Risk management is the identification, measurement and
economic control of risks that threaten the assets and
earnings of a business or other enterprises. The word
"economic" requires emphasis. There is no
point in spending more money for preventing losses than
the losses themselves would cost taken as a whole or
taking 100 percent effective loss control action at
a cost too great for the business to afford.
INSURANCE COVERS AVAILABLE
Insurance Industry has always moved with the requirement
of the industry. Right from the planning stage of the
plant , insurance involvement is not uncommon. The main
reasons for the same are,
- To get an overall idea on the
premium for budgeting purpose
- To device a suitable cover for
the Project Stage
- To incorporate insurance suggestions
before freezing the layout.
- To plan for operational insurances
In this session I have
concentrated on the Operational Insurances.
Various products which are popular are,
A) Fire and
Special Perils Insurance Policy
Fire and Special Perils Insurance Policy provides
protection to property against damage resulting from
the following perils:
- Explosion/ Implosion
- Aircraft Damage
- Impact Damage
- Bush Fire
- Riot, Strike and Malicious Damage
- Storm, Cyclone, Flood, Inundation
- Subsidence, landslide, Rockslide
- Missile Testing Operations
- Bursting and /or Overflowing
of Water Tanks, Apparatus and Pipes
- Leakage from Automatic Sprinkler
Unforeseen and sudden physical loss or damage to insured
- Short circuit, Open circuit,
Insulation failure, Lubrication failure.
- Faulty operation, Failure of
- Faulty design, Faults in erection,
Defects in material or casting, Lack of skills,
Negligence, Bad workmanship.
- Centrifugal force, Explosion
implosion of pressure vessel, Tearing apart, Entry
of foreign bodies.
& Pressure Vessels Policy covers
- Damage (other than fire) to
the boilers and other pressure plant
- Damage (other than fire) to
the surrounding property of the insured
- Liability on account of death
or bodily injury to any person not employed by
- Liability on account of damage
to the property not belonging to the insured
Loss of Profit
- The policy covers consequential
losses due to business interruption arising from
the perils covered under Fire & standard perils
Insurance. Indemnity granted is
- Reduction in turnover
- Increase in cost of working
- Loss of gross profits
- Losses as a result of reduced
turnover because of the damaged machinery and
the additional expenditure necessarily incurred
for avoiding or reducing the fall in turnover
for the interruption period are compensated under
this policy as a result of business interruption
following a loss covered by the fire policy.
- The policy offers cover against
damage due to all perils covered under
- Standard Fire and special perils
- Burglary insurance policy
- Machinery Breakdown/ Boiler
explosion/ Electronic equipment Insurance
- Business Interruption due to
Standard fire and special perils and machinery
Liability - Industrial
- Policy protect your industry
against loss by-
- Legal liability and litigation
costs arising out of accidents occurring in the
Decision on the Insurance Coverage either during project
stage or operational stage is an essential part of
management of risks in any industry.
However for Chemical Industry it gains more importance
because of nature of the Raw Materials, Process, higher
Probable Maximum Loss, greater Public Liability exposures,
enhanced Consequential losses etc.