Risk management, a terminology, not an integral tool of Non-life insurers, but a global phenomenon to be adopted, accepted and followed by all and sundry.
A man in the street does Risk management to safeguard himself from the vehicular traffic, railway crossing, following road safety rules, etc.
A beggar in the street occupies a safe place for begging to safeguard him.
A housewife does all the risk management whilst cooking and doing other household work – viz. putting off the gas after cooking, opening the windows whilst pressure cooker is on, putting off geyser after filling the water in the bucket or bathtub, etc.
Similarly, various industries adopt various risk management methods in their day to day business activities- a spark or lighted match stick can destroy the factory. Risk management, generally for non-life insurers, relates to fire and explosion risks. But it is not so since it is related to all spheres facing all the risks element. A convenient, practical and concise definition of Risk Management is the economic protection of a company’s assets and earnings against loss. It need not encompass the widest possible range of losses but in particular, it should embrace the concept of total loss control. Risk management is concerned with the planning, arranging and controlling of activities and resources to minimize the impact of uncertain events.
The purpose of risk management is to explore some of the basic concepts of risk, to analyze the nature of the costs associated with risk and to see how risks may be managed. Risk is defined in terms of chance of probability of loss. It can be measured in terms of the probability that such an event can produce loss and definite loss and the probability is measured in terms of the degree of uncertainties. There are various risks associated with the business activities viz. Production risks, marketing and distribution risks, financial risks, personnel risks, environmental risks, etc. These risks are inherent in business activities. Our concern is only about the risks which produce definite losses which are the main concern of the insurers and the nation. The following risks are to be elaborated to highlight the importance of risk management.
Pure Versus Speculative Risks
Pure risks are those risks where the occurrence of the event results at a best in no change in the situation of the individual or organization exposed to risk, though more likely causes a loss with no possibility of again.
Whereas in the case of speculative risks, the outcome may be either a loss of profit. Our concern is to combat the pure risks which lead to certain loss.
Dynamic Versus Static Risks
Dynamic risks arise from the changes that take place in every society, that is, economic, social technological, environmental and political changes and they are closely associated with the speculative risks. The static risks are those that would exist in the absence of such changes.
Fundamental Versus Particular Risks
Fundamental risks are those which affect the whole of society or a major part thereof, such as uncertainties arising out of the economic or political system or natural catastrophes such as earthquakes and floods. They are both impersonal in cause and effect.
Particular risks, on the other hand, affect mainly the individual or firm and arise from factors over which exert some control. However, society collectively should accept responsibility for the losses incurred by individuals arising from fundamental risks, whereas individuals should make their arrangements for dealing with particular risks. Invariably to maintain the expenditure for risk control is quiet expensive, risk management is not done for the economy which results in disaster towards a huge national loss.
Examples of huge national losses are highlighted below.
Alpha Piper disaster
Gas leaking on the offshore Rig on 6th July 1988 at 10 P.M. Leakage of gas from the valves accumulated under the platform resulting in the death of 167 people and property loss of 2700 million dollars.
21st April 1865 -Sultanate steamer carrying 1815 people met with a severe disaster due to the Boiler leakage explosion due to overutilization of resources resulting from temporary welding at the leakage point. This led to a loss of 1238 human lives.
Disaster Menu Cont – On 20th March 2001
40 Storied offshore Rig platform of Brazil coast sink after an accident, resulting in loss of human lives and property loss of 500 million dollars.
Flixborough UK 1974 – Cyclohexant plant with three reactors. One of the reactors required change. To avoid cost and economy, the materials were transported from one reactor to the third reactor bypassing the second reactor. This unable to resist corrosion and temperature, as piping was of different construction, resulting in loss of human lives and property losses of unexplained dimension.
Bhopal Gas Tragedy (2nd and 3rd December 1984)
40 Tonnes (MIC) leaked – Worst Industrial accident resulting in the death of 8000 people and over 5-lacs people suffered from injuries. Many died due to delayed medical treatment.
This certainly recalls the saying of Mahatma Gandhi “There is more to do in life than to increase its speed”
Disaster is ruination and destruction and calls for disaster control management. Unless the Government and the concerned authorities do not take initiative to control such disasters, the people of the nation and the nation will be at the mercy. Hence it calls for Risk Management at all levels and the importance of the Risks Management should be highlighted at all levels.
Let us understand the Risk Management Processes and Administration
The job of risk management can be broken down into the following elements which follow each other in a logical sequence
- Risk analysis risk identification and risk evaluation
- Risk control risk avoidance, risk reduction, risk retention
- Risk financing risk transfer, and insurance.
The above risk management processes are to be carried out by all the business organizations mandatory for the wellbeing of the nation and its people and it should comply with certain specific standards, rules, and regulations laid down by the law of the nation.
It has certainly cautioned the corporate circles and they are religiously following the risk management control to the extent most of the corporate organizations have appointed their Risk manager for this job.
Even audit has been instituted to examine all these aspects to ensure that safety measures have been taken at all levels vis-vis the required safety standard has been maintained permanently to safeguard the human lives and properties. Some of the corporate giant viz. British Petroleum, United Glass Ltd., Marks, and Spencer are some of the British companies, which are the pioneers in the implementation of Risks management with full fledge infrastructure and technical expertise to deal with the risk factors in the organization.
Whilst making a critical analysis of the risk factors, we should highlight the general hazards prevailing in various industries. Various hazards are to be analyzed, understood and solutions to these hazards should be found out to combat the risk factors. Various hazards relating to a few industries are underlined hereunder :
Cotton Ginning and Pressing Factories and Godowns Location Hazards
For cotton ginning and pressing factories, the location should be near cotton-growing areas, facilitating easy transport of raw materials. Exposure of kuppas and lint, in the light of size and storage in open, to transport vehicles, belching out exhaust gases from the engines makes the hazard pronounced. Similarly risks located near Railway tracks or siding face similar exposure from the exhaust of steam engines and sparks which may ignite cotton in open. This is due to the accumulation of cotton fluff under the floors which may ignite spontaneously.
Process Hazards
All the factories do not have any system of fluff or dust extraction and these would be seen depositing on motors, controls and starters and the lighting. Manual cleaning is no doubt done, but this is far away from the solution to the problem. Most of the fires are due to ignition of fluff coming in contact with the heated surface of machinery and consequent spread to stocks lying in proximity.
The wiring system in some places with temporary wire suspended also contributes to fire. The motors are no doubt enclosed but still fluff enters through grill opening for air sucking to cool the motor. The seed of the lint is separated and this seed is discharged outside through a screw conveyor system located underground. But inefficient lubrication of the moving system and bearings causes fires. Static charges created due to movement of kuppas in ginneries or the screw conveyors also cause fires.
Warehouse storages:
Since there is no limit to height and storages are invariable unto the roof limit. They are normally in a range with godowns adjoining and separated by non-standard partition walls. Therefore the fire load is most pronounced. In case of fire breaking out in any godowns, in the event of failure of instant detection and extinguishment the fire will gain severe intensity and start spreading. And extinguishment will be difficult. Most of the godowns of the stocks are under the key loans with the Bankers which others will have no access in case of fires until the godowns are opened. There are many instances when the fire from open storages has spread to such types of warehouses.
Open storage:
Due to no proper space between storages will render fire fighting difficult. Given the vast open area and the factory in country areas, the wind movement is heavily susceptible to lightning and sometimes short circuits are caused by the sparks igniting cotton. Even the transport vehicles using diesel have their exhaust system being ineffective with a lot of gases mostly carbon monoxide produce an ignitable mixture.
There are also various miscellaneous hazards resulting from the cotton business being dealt with by private owners. Who has an interest only in purchasing cotton and selling in the market? In such cases, they do not maintain fire fighting facilities in working conditions and also the storage of kuppas and bales done indiscriminately. Many instances of fires broke out in stocks held by state or center slowed bodies. There is slackness in fire fighting operations.
Textile Industry:
Every section of a textile mill small or big, from cotton godowns to the storage of finished products is associated with a fire hazard. Following are the causes which mainly contribute to fire hazards in various departments or godowns of a textile mill
- Mechanical friction
- Fluff
- Electrical short circuit
- Electrostatic charge
- Bad housekeeping
- Human negligence
- Improper stacking and storage
- Faulty construction
- Use of flammable materials like petrol, gas, kerosene, etc.
Fire in cotton godowns may be caused due to the following reasons:-
- Spark caused at the time of stacking bales if the iron hoops collide with each other,
- Once the bales are stacked in the godowns, due to heat, the hoops expand and collide against each other causing a spark
- Due to inadequate ventilation and improper stacking of bales in the vicinity of electrical wiring.
- Due to electrostatic charges or some such causes resulting in spontaneous heat and combustion.
- Human negligence – such as throwing cigarettes, etc.
- Some cotton godowns are built on North-light principle
Processes and Machinery
Fire in Blow and Mixing rooms are very frequent and losses could be substantial given large quantities of cotton. The cotton bales contain several impurities like trash, broken seeds, stalk, rivets and at times iron particles and when cotton is fed into a bale opener despite magnets provided in the machines many a time the iron particles give a spark due to mechanical friction. The modern Blow room is completely automated and a spark resulting from any of the above machines spread amazingly fast to all parts of the room.
The presence of wooden enclosures around machines and Hessian cloth partitions erected may help to spread the fire.
Due to electrical short circuits also resulting from electrical wiring of infra-red lamps causes fire storage of loose cotton or laps near electrical switchgear may also lead to a fire in Blow room.
Carding, spinning preparatory and spinning departments are also susceptible to fire due to the following reasons:
Hot pedestal bearings in the line shaft drive (if group drive is installed)which would ignite the fluff on the shaft and ceiling
- Hot licker-in side bearing pedestals,
- Friction between cyclones and doffers,
- Friction between licker-in and under casting,
- Friction between metallic belts, strap, and pulley,
- Electric spark due to a broken flexible, faulty starter, switch or stop motion mechanism and
- Static charges etc.
Other hazards in Humidification plants, being wet process, conspicuous hazard arises in return air system where all dirt and fluff will be sucked in from the departments and the entire return air path will be full of such refuse. Any accidental fire in the return air path is not only hazardous but also pose problems that being in a confined area and fire fighting will be difficult Humidification ducts would act as flues at the time of the fire and help in spreading fire.
More importantly, Fluff which is the worst enemy of the textile industry exists almost in all departments. It accumulates and settles on machines, walls, ceilings, overhead shafts, and pedestals, on partitions, floors and electrical types of equipment. Even a small spark due to friction or electrical fault is sufficient to spread fire across the fluff covered surface.
Without going into an in-depth study of hazards in other industries, it is necessary to highlight the basic Loss Prevention methods to implement Risk management measures. Loss Prevention and Risk management are complementary. Hence it is necessary to carry out Risk inspection every three years in such industries that are exposed to various risks.
Some of the basic loss prevention measures are underlined hereunder to highlight Risk Management:
- The godown must be a single-story building built of non-combustible material. Exposed steel columns if any should be fireproofed with concrete.
- Provide automatic sprinkler protection or smoke detectors in the godown and plants.
- Segregation of hazardous and extra hazardous materials by perfect party walls.
- Electrical installation and fittings should be as per the standard and codes specified as per the Indian Factories Act, 1948,
- Most vulnerable departments susceptible to fire should be segregated from the rest of the departments,
- Use of combustible materials like Hessian/wooden partitions/ enclosures must be avoided,
- Storage of loose cotton/laps near electrical equipment should be avoided.
- A very high order of housekeeping should be maintained,
- Fire extinguishers and hydrant protection should be installed on each floor and/Or in all the departments of the processing units,
- All the machinery should be maintained and inspection of these machines should be done periodically,
- Provide separate room for waste and fluffs etc. and should be disposed of daily,
- Deploying expertise in fire fighting with a safety officer to monitor the plant
- Proper ventilation should be provided to control the spread of fire,
- Proper storage facilities should be provided with segregation of hazardous, non-hazardous and extra hazardous materials in separate compartments isolating by perfect party walls,
- No Smoking signboard should be displayed in the processing units and other rooms that are vulnerable to any risks.
- Providing an effective and efficient system of earthling to the metallic parts and checking regularly for proper maintenance.
Many other such loss prevention measures vary from industry to industry. Hence it is necessary to carry out risk inspection every three years to introduce loss prevention measures effectively to run the business efficiently.
All said and done, but with the privatization and Detariffing of the insurance, Risk inspection and risk management have taken a back seat and they are ignored and neglected by all the insurers operating in the Indian soil. Stiff competition in the insurance market led to grabbing of insurance business by hook or crook, least bothering the corporate bodies, who indulge in cutting down their economy at the cost of the insurance.
Is it fair to do away with the risk management processes?
No, ridiculous, one should not forget, “A loss to the insurance company is not just a loss to the insurers, but the nation as a whole. It is evident how the earlier disasters have ruined the nation and its people. It is pathetic that IRDA and the Government of India turning their nelson eyes on such vital aspects that affect the nation.
Aggressive marketing of the non-life insurers has spoilt the basic objective of the insurance. Insurance being security has become a profit-making commodity for the insurers. Social obligation and objectives are defeated with stiff competition, affecting the nation and its people.
Is it not the duty of the IRDA to monitor such unethical business activities perpetrated by the insurers?
There should be a certain standard to be maintained for such an insurance business that is vulnerable to the nation. It is high time that IRDA calls for all the Risks inspection reports of major corporate bodies including small scale sectors in the Industrial estates of our country which are not maintained for public safety and security. Premium rating is one aspect but risk inspection is a must and all the insuring industries should implement loss prevention measures as suggested by the professional engineers in their risk inspection reports.
Author
Mr. P. V. Sethu
Manager, H.O., New India Assurance Co. Ltd, Mumbai
Published in The Insurance Times, April 2010
