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 plant.

This life cycle is summarised as below :


Stage Comments
Planning Includes strategy, research & development and process selection
Process Design Layout of installation and broad equipment specification agreed
Design Engineering Preparation of engineering drawings and detailed specification for equipments fabrication, purchasing and operation
Construction and Erection, checking, testing and introducing feed stock Commissioning
Operations Including periodic shut down for maintenance, modifications or for operational reasons
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.

Analysis of losses:

An Analysis of 460 major losses in chemical industries according to 10 hazard factors is illustrated here :

Hazard Factors
No. of Times Assigned
Percentage of Total
Equipment Failures
Inadequate Material Evaluation
Operational Failures
Chemical Process Problems
Ineffective Loss Prevention Measures
Material Movement Problems
Plant Site Problems
Structures not in conformity with
Operational Requirements
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 and operations.


Process of Risk Management

The process of Risk Management consists of the certain steps/activities
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 assets; the
sources of direct and indirect earnings, exposures to product liability which can be imposed by common law or statute.


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 warnings.

Preventive maintenance is an essential area of study as the potential for risk control and risk reduction in this are is most significant.

Financing Analysis:
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:

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.

Risk financing:
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 benefits.
  • Marketing risk: Will potential customers want the product? Could it be made obsolete by changes in taste, location, service needs?
  • 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 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:

  • Fire
  • Lightning
  • Explosion/ Implosion
  • Aircraft Damage
  • Impact Damage
  • Bush Fire
  • Riot, Strike and Malicious Damage
  • Storm, Cyclone, Flood, Inundation etc.
  • Subsidence, landslide, Rockslide
  • Missile Testing Operations
  • Bursting and /or Overflowing of Water Tanks, Apparatus and Pipes
  • Leakage from Automatic Sprinkler Installation

B) Machinery Breakdown Policy

Unforeseen and sudden physical loss or damage to insured items following:

  • Short circuit, Open circuit, Insulation failure, Lubrication failure.
  • Faulty operation, Failure of safety devices,
  • 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.

C) Boiler & 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 the insured
  • Liability on account of damage to the property not belonging to the insured

D) Consequential 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.

E) Industrial All Risks

  • The policy offers cover against damage due to all perils covered under
  • Standard Fire and special perils policy
  • Burglary insurance policy
  • Machinery Breakdown/ Boiler explosion/ Electronic equipment Insurance
  • Business Interruption due to Standard fire and special perils and machinery breakdown policy

F) Public Liability - Industrial

  • Policy protect your industry against loss by-
  • Legal liability and litigation costs arising out of accidents occurring in the insured premises

G) Transpotation of Goods

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.

Shri V.R. Datta, basically a B.Tech from IIT Kanpur is a Fellow of Insurance Institute of India. He has on his credit 28 years working experience out of which 5 years in industry and 23 years in Insurance. He is a member of Tarrif advisary group for Fire Tariff Rivison and Petrochemical Tariff revison. Presently operating as Risk Management Consultant.