To improve the risk culture of an organisation businesses need first to adopt a holistic business risk identification process that helps the company identify the most critical part of its business to ensure its continued operation or survival.
There are several key questions that you can ask to isolate the aspects of your business that need to be safeguarded to ensure its survival or at least a minimum level of operations.
Everything flows from here, and every business will have different critical factors depending on what it does. These can range from natural catastrophe, equipment or supply chain exposure to capital and debt levels.
Once these critical aspects are identified, you can go about assessing the risk and working out ways to mitigate or address it.
It is important to remember that this should be a continuous process and not an isolated exercise, because as we have seen, things can change quickly. For this reason, we talk about business continuity management rather than planning.
In our experience, companies that have good strategic processes in place to proactively assess and plan around risk exposures are better equipped to weather an incident or crisis.
This awareness of risk exposures and the ability to take active steps to mitigate losses helps grow a culture of resilience and leads to greater business continuity.
Hurdles To Effective Risk Management
In our region, risk management is often overshadowed by strong revenue and market growth, so the focus is often on realising growth opportunities rather than protecting the business you already have.
That is a dynamic of growing economies and something we continue to work to address by pointing out the business value that comes with resilience.
The business interruption caused by the current pandemic is likely to be a catalyst for change, particularly where it has impacted critical supply chains or where cyberattacks have targeted new vulnerabilities presented by home-bound employees.
Some companies might argue that their businesses are dynamic and will evolve in response to the market, or that their risk can be transferred. But as the current situation has shown, you can’t outsource the risk completely.
Asia market dynamics also affect risk profiles in other ways. In pre-pandemic growth or developing markets, companies can push equipment to the edge to capitalise on the market opportunity.
Many businesses in Asia run their machines harder, longer and often beyond capacity as the maintenance of business-critical machinery gives way to the demands of business growth.
Should these critical machines fail, the potential economic impact will be significantly greater in comparison to those in manufacturing-light countries. In the current climate, idle equipment and facilities, or facilities refitted to serve a new business purpose also pose a significant business risk.
In heavy industry, shutting down and restarting equipment is difficult and complex, while the fire risk profile for a facility may change significantly if its function changes.
In order to evaluate losses caused by equipment breakdowns we must better understand the reasons for these failures.
In a recent global study, we found that lack of regular equipment maintenance is the leading cause of large equipment losses at 62 percent, this is followed by lack of or poor operator training at 43 percent, and safety device failures at 37 percent.
In addition, the study also found an increase in human influence on equipment losses. Nearly 50 percent of last year’s large risk losses from equipment breakdowns were the result of human interaction. These incidences are likely to be higher in Asia.
As post-pandemic recovery could exacerbate these challenges, it is imperative that businesses use this period to rethink the trade-off they are making with their critical equipment and invest in resilience so they are best prepared to take advantage of an economic upswing.
Advice To Petrochemical Companies On Risk Management
There are some general tenets that apply like ensuring a company’s leadership understands how impacts on different operational elements can cause losses, so there is buy-in in ensuring key operational assets are well maintained.
We typically partner with companies who align with our philosophy and values, and those who share our view that the majority of losses are preventable. This is important if we are to partner meaningfully.
So, while the business opportunity is high due to the overall rising energy consumption levels, we might not appeal to everyone in the market and not all opportunities are the right fit for us either.
The way we work, our engineers will visit a site at least once a year to assess the client’s plant and work alongside them to improve the risk quality of their operations gradually over time.
There is more engagement so that we can follow-up on your risk improvement journey. In this case, FM Global is far more than just a risk transfer solution. We manage risk through loss engineering and help to control and transfer your risk.
At the end of the day, if we look at it holistically, we are safeguarding your deductible as well. In the Power Gen sector, your deductible for something like a gas turbine will be between US$1m and US$2m out of your pocket every time you have a loss. So, every time you avoid a loss to your gas turbine, you save that amount.
Improving Plant Loss Record
At FM Global we focus on preventing loss altogether, based on the principle that the majority of losses are preventable. We are not just an insurance company, we are trying to keep businesses operating based on a combination of engineering, research and analytics expertise.
At the same time, we actively work to build a loss prevention culture among our clients. As a mutual company, our clients have a stake in our business as we have a stake in theirs, so culture is important.
Our engineering focus helps us to underwrite and our underwriting is helping to support engineering development to prevent losses. Underwriters and engineers work closely together and there is a great deal of knowledge transfer.
Importantly, engineers can deliver better information to underwriters if they understand how that information is used, so this relationship is important.
We visit facilities and help engineers ensure their machines are well maintained and why they should invest in maintenance. We have developed a remote engineering capability during the pandemic to maintain this function.
One of the strongest tools in convincing companies to focus on maintenance is calculating what the total financial loss might be if a critical machine breaks down.
FM Global’s Total Financial Loss quantifies the un-insurable impacts of potential equipment failures, such as loss of market share or reputational risks.
This can effectively help clients understand the magnitude of the business impacts, making a stronger case for the need for risk improvements.
Furthermore, engineers develop equipment loss scenarios that are constantly refined to identify deficiencies. These scenarios are the key to quantifying the associated risks, communicated to clients through the Loss Expectancy (LE) process.
The LE provides a realistic quantification of the risks involved, defines the magnitude of the risks and helps businesses focus their risk improvement planning, not only on the equipment most at risk, but also on the equipment that creates the greatest exposure to the resilience of the business.
From there, the underwriting team will be better equipped to assess, and recommend the best solutions and protections against potential risk of equipment loss.
Beyond identifying equipment at risk, teams on the ground must be equipped with proper operational skills and the ability to respond when a breakdown occurs.
Regular training should be enforced to educate and empower the workforce, while support and monitoring should be in place to prevent acts of negligence or sabotage.
A holistic equipment risk improvement strategy requires a combination of engineering, research and analytics expertise. More importantly, businesses need to actively work to build a loss prevention culture across the company.
This article was originally published on Industrial Automation Asia, September 2020 Issue.