Essential Elements of a Formal Risk Management Program
Authors: Alderman J.A. , Lewis S.J. 
Published: October 2008

Traditionally, managing risk that threaten life, assets, and the continued competitiveness of an organization in the petroleum industry has often been practiced by several functions within the organization (e. g., production, engineering, safety, security, and accounts). Actions have been taken to combat some forms of risk to the organization, although this has tended to be on an ad hoc, piecemeal basis.

The best means of integrating these activities is through the development of a company-wide formal risk management program. Eight main elements comprise such a program, which are as follows:

* Corporate risk management policy

* Communication of risk management program

* Identification and evaluation of major risk exposures

* Integrated decision-making process

* Risk-financing strategies

* Cost-effective insurance program

* Contingency plans

* Annual risk management report

The purpose of each of these activities will be described, giving examples that prove their successful application in the safety engineering and management regime.

Introduction

The practice of risk management has been receiving a great deal of attention in business circles lately. Business journals have published numerous articles on the subject, and business schools have expanded their curriculum in the area.

The benefits of risk management include an improved understanding of the factors affecting business success and failure, a method to prioritize the use of scarce resources to reduce corporate risks, and improved profitability through improved loss control performance.

Risk management can help a company uncover the bidden costs associated with corporate activities. Unless all costs, including potential future costs of current activities, are recognized, a company may be fooled into believing that corporate profits are acceptable-only to find these profits consumed by property damage losses, business interruption losses, product liability losses, etc.

As an example, a company recently began operating a plant designed to generate electricity and steam for internal use by existing facilities. Prior to startup, a hazard review was conducted to determine the risk of operation. The bawd review team identified a number of hazards with the potential to result in short-duration plant outages, and some modifications were made to improve plant reliability. However, the risk associated with short-duration outages was not considered high, since the local electric utility was available as a backup source of power.

One piece of information not available to the review team was the power contract with the utility called for a substantial demand charge for any excess power imported during summer peak power usage periods. This "hidden" charge made the cost of unreliable operation much higher than what was originally believed; therefore, the company modified its operating practices accordingly to better control the potential costs.

Understanding Risk

Risk comes in many different categories, including property damage, personal injury and product liability. In addition, other risks to business success that are not well identified may exist. Risk management provides a framework for identifying and controlling all risks.

At a practical working level, risk is determined by combining the severity of the potential consequences of an unwanted event with the likelihood that the consequences will occur.