RISK MANAGEMENT ESSENTIAL IN SHIPPING

SHIPPING RISK MANAGEMENTDSM 2314

TESALONITA ANAK PAUL 1140400793

RISK MANAGEMENT• process that identifies loss exposures faces by an

organization and selects the most appropriate technique for treating such exposures.

• A loss exposure is any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

Redja (1992)

OBJECTIVE OF RISK MANAGEMENT

• Pre-loss objective- Prepare for potential losses in the most economical way (economical premium/safety programs)- Reduce anxiety (threat of catastrophic lawsuit will causing greater anxiety than small loss from fire)-Meet any legal obligation (HSE issues)• Post-loss objective:-Ensure survival of the firm (firm can resume at least partial operation within some reasonable time period)-Continue operations-Stabilize earnings -Maintain growth-Minimize the effects that a loss will have on other persons and on society

RISK MANAGEMENT PROCESS

IDENTIFYING LOSS EXPOSURE

Property loss

exposures

Liability loss exposures

Business income loss exposures

Human resources loss

exposures

Crime loss exposures

Employee benefit loss exposures

Foreign loss exposures

Intangible loss exposures

Failure to comply with government

rules and regulations

Risk Managers have several sources of information to identify loss exposures:

• Questionnaires• Physical inspection• Flowcharts• Financial statements• Historical loss data

Industry trends and market changes can create new loss exposures.

• e.g., exposure to acts of terrorism

MEASURE AND ANALYZE LOSS EXPOSURE

Measure analyse the loss exposures

Estimate the frequency and severity of loss for each type of loss exposure.

Loss frequency

Loss severity

Once the loss exposures are analyse they can be ranked according to their relative important.

Loss severity is more important that loss frequency The maximum possible loss is the worst loss that could happen

to the firm during its lifetime. The probable maximum loss is the worst loss that is likely to

happen.

Risk management matrix

High severityLow frequency

High Low

low

(Severity)

(frequency)

Low severity High frequency

High severityLow frequency

Low severityLow frequency

SELECT THE APPROPRIATE COMBINATION OF TECHNIQUES FOR

TREATING THE LOSS EXPOSURE

RISK CONTROL

• AVOIDANCEThe strategy of risk avoidance or elimination involves elimination of risks at the source :(a) chemical-related activities (e.g. banning production and transport of chemicals),

(b) transport/distribution hazards and their effects (e.g. designing and manufacturing stronger and more secure packages for the carriage of materials and substances of class 7 – radioactive materials and wastes)

(d) causes and contributing factors accidents/ incidents involving dangerous goods releases, their consequences.

(e)elimination of the maritime transport of certain chemicals, for example, persistent organic pollutants.

• PERSISTANT ORGANIC POLLUTANTS (POP):toxic chemicals that adversely affect human health and the environment around the world.

THE STOCKHOLM CONVENTION (2001)

-purpose is to safeguard human health and the environment from highly harmful chemicals that persist in the environment and affect the well-being of humans as well as wildlife. ROTTERDAM CONVENTION

(Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade)- hazardous chemicals BASEL CONVENTION- hazardous waste

OTHERS CONVENTION RELATE WITH ENVIRONMENT

CONVENTION ON THE PREVENTION OF MARINE POLLUTION OF WASTES AND OTHER MATTER / LONDON CONVENTION 1972-control pollution of the sea by dumping and to encourage regional agreements supplementary to the Convention. It covers the deliberate disposal at sea of wastes or other matter from vessels, aircraft, and platforms MARINE POLLUTION (MARPOL 73/78) UNITED NATIONS CONVENTION ON LAW OF

THE SEA (UNCLOS)

LOSS REDUCTION

refers to measures that reduce the severity of a loss after is occurs

Mitigation: that means to make or become less severe or harsh, or moderate mitigating risk control occurs when risk control measures reduce the severity of outcomes of the events or subsequent events, should they occur

SELENDANG AYU SHIPWRECK

• The grounding caused the ship to break in half • oil spill of approximately 336,000 gallons of fuel oil and diesel fuel

that led to an environmental cleanup lasting until June 2006. • During the rescue operations a coast guard helicopter crashed and six

of the vessel’s crew died just moments after being rescued • Non of crew wear immersion suites

OIL SPILL

LOSS PREVENTION

Refer to measures that reduce the frequency of a particular loss

• The Deepwater Horizon oil spill began on 20 April 2010 in the Gulf of Mexico on the BP-operated Macondo Prospect.

• It claimed eleven lives and is considered the largest accidental marine oil spill in the history of the petroleum industry.

• The explosion and sinking of the Deepwater Horizon oil rig, a sea-floor oil gusher flowed for 87 days, until it was capped on 15 July 2010.

The Worst Fire of Oil Rig in Gulf of Mexico

With the Occupational Safety and Health Act of 1970, Congress created the Occupational Safety and Health Administration (OSHA) to assure safe and healthful working conditions for working men and women by setting and enforcing STANDARDS and by providing training, outreach, education and assistance.

Occupational Safety and Health Act

An International Convention on Oil Pollution Preparedness, Response and Co-operation are required to establish measures for dealing with pollution incidents, either nationally or in co-operation with other countries.

Oil Pollution Preparedness, Response and Co-operation

• A Myanmar man, who drove a forklift dead after had been squashed by a container under a crane.

• The man who was working at Port Klang died after he got a very serious injuries at his head and his part of the body.

A Man Had Been Squashed By A Container

Personal protective equipment, commonly referred to as "PPE", is equipment worn to minimize exposure to serious workplace injuries and illnesses. These injuries and illnesses may result from contact with chemical, radiological, physical, electrical, mechanical, or other workplace hazards. Personal protective equipment may include items such as gloves, safety glasses and shoes, earplugs or muffs, hard hats, respirators, or coveralls, vests and full body suits.

Personal Protective Equipment

• This incident happened in Port of Auckland, however this incident does not appear in any maritime news or magazines.

• The crane was accidentally turned upside-down after lifting a very heavy container.

Accident of Straddle Crane

Under the 1976 Convention, the limit of liability for claims covered is raised considerably, in some cases up to 250-300 per-cent. Limits are specified for two types of claims – claims for loss of life or personal injury, and property claims (such as damage to other ships, property, or harbour works).

Limitations of Liability for Maritime Claims

RETENTION

•Active Retention•Passive Retention

•Self Insurance

Active RetentionAn Individual is consiously aware of the risk and deliberately plans to all

of part of it.

Passive RetentionRisks may be unknowingly retained because of

ignorance, indifference or laziness.

Self InsuranceA special form of planned retention by which part or all of a given loss exposure is retained by the firm.

Advantages And Disadvantages

• Save on loss costs• Save on expenses• Encourage loss prevention

• Possible higher losses• Possible higher expenses• Possible higher taxes

NonInsurance Transfer

• Hold-harmless clause• Hedging

• Credit Transfer

A transfer of risk by contract, such as through a service contract or a hold-harmless clause in a contract

Hedging is a technique for transferring the risk of unfavorable price fluctations to a speculator by purchasing and selling futures contracts on an organized

exchange

Incorporation of a business firm transfer to the creditors the risk of having insufficient assets to pay business debts

Advantages And Disadvantages

• Can transfer some losses that are not insurable

• Save money• Can transfer loss to someone

who is in a better position to control losses

• Contract language may be ambigious, so transfer may fail

• If the other party fails to pay, firm is still responsible for the loss

• Insurers may not give credit for transfer

Insurance

• Insurance is appropriate for loss exposures that have a low probability of loss but for which the severity of loss is high.

- A deductible is a provision by which a specified amount is subtracted from the loss payment otherwise payable to the insured.

- An excess insurance policy is one in which the insurer does not participate in the loss until the actual loss exceeds the amount of the firm ha sto be decided to retain.

Insurance

• The risk manager negotiates the terms of the insurance contract. -A manuscript policy is a policy specially tailored for the firm. -The parties must agree on the contract provisions, endorsements,forms and premiums.

• The risk manager must periodically review the insurance program.

Types of insurance

• Hull And Machinery • Protection And Indemnity

• Marine Cargo

Advantages And Disadvantages

• Firm is indemnified for losses• Uncertainty is reduced• Insurers may provide other

risk management services• premiums are tax deductible

• Premiums may be costly (opportunity cost should be considered)

• Negotations of contracts takes time and effort

• The risks manager may become lax in exercising loss control

Implementation of a risk management program begins with a risk management policy statement

that:• Outlines the firm’s risk management objectives • Outlines the firm’s policy on loss control• Educates top-level executives in regard to the risk

management process• Gives the risk manager greater authority • Provides standards for judging the risk manager’s

performanceA risk management manual may be used to:

• Describe the risk management program• Train new employees

• A successful risk management program requires active cooperation from other departments in the firm

• The risk management program should be periodically reviewed and evaluated to determine whether the objectives are being attained-The risk manager should compare the costs and benefits of all risk management activities