'Good chemistry': one of the challenges chemical manufacturers face is convincing their insurance partners that making chemicals isn't as risky as people perceive it to be. Another is for them to maintain relationships with their brokers to help them get through tough times

Risk & Insurance, June, 2004 by John (American clergyman) Williams

Every industry has experienced significant changes in the last couple of decades in terms of risk management issues. This includes how wide the field has become and also how deep. Few industries, though, have experienced the changes that have occurred in the chemical industry. While some industries might have buckled under the pressure, the industry has actually emerged stronger as a result of its approach to risk management.

It's been a long learning process, though, according to Steve Arendt, vice president, Process Industries Market Sector, for ABS Consulting of Knoxville, Tenn. "Into the 1970s, companies tended to blame equipment for problems," he says. Then, in the late 1970s and early 1980s, they blamed people.

"The Bhopal disaster in 1984 was a hallmark event, though," he says. "As a result of this and some other release events in the United States in the 1980s, things started to change. Regulatory agencies began to act, and the industry began to react." At this point, according to Arendt, companies began to suspect that management systems were at the root of problems. "In the future, I think it will be a combination of management systems and company culture," he adds.

So what are chemical company risk managers facing these days? Actually, they face virtually all of the same risks that other industries do. Three issues, though, seem to be of particular concern and interest--enterprise risk management, broker relationships and security issues.

PULLING IT ALL TOGETHER

"The trend in the chemical industry toward integrated risk management is very helpful," says Stephen Esposito, senior environmental engineer with the Jacques Whitford Co. of Dartmouth, Nova Scotia, an environmental, geotechnical and risk management consulting firm. "However, it means that risk managers will need to work more closely with their counterparts in legal, operations, and so on, to help identify what the issues are and then work together to come up with solutions."

Marc Armstrong, managing director with the AON Corp.'s pharmaceutical and chemical unit in Philadelphia, agrees. "A number of chemical companies are starting to look at risk from an enterprisewide basis," he says. "Much of this demand is being driven by senior managements, which realize that they need to have a complete understanding of their risk exposures."

One reason, according to Armstrong, is that as managers are under pressure to cut costs, they are doing everything they can to produce more with less, and enterprisewide risk management is one such strategy to help them achieve this.

As a result, many companies have identified their risks, quantified them via risk maps and created formal risk assessment reports. "They are also beginning to model these and look at them from an overall risk portfolio standpoint--how they can design risk financing strategies to address the totality of risk they are facing," he says.

To get started in ERM, many companies bring people in from operations, production, accounting and other facets of the business to talk about risk. "I have attended some of these meetings, and what I find is that a lot of these people, as they begin to talk about risk exposures, end up getting together in ways they hadn't before," says Armstrong. "They all start to see different facets of the business that they hadn't seen before."

NOVA Chemicals Corp. in Calgary, Alberta is one company that manages risk at the enterprise level, but does so in an innovative way. "Everyone's definition of ERM is different," explains Brad Silver, NOVA's risk manager. "I think the field of risk management is too broad these days to have it all 'under one hat.'"

What NOVA does is manage risks through specialized groups, such as financial risk management, operational risk management and commodity risk management. Managers then report all of their risks to a board committee, where everyone then focuses on the interactions among the different risks.

BROKER RELATIONSHIPS

While embracing ERM and making it work is a challenge, some chemical industry risk managers find that creating and maintaining productive broker relationships is an even greater challenge--one that may be unique to the chemical industry by the nature of its business. The adoption of ERM is often a critical element to building strong, viable broker relationships, the risk managers say.

"Part of what chemical industry risk managers need to do is work closely with their underwriters--getting them to a very high level of understanding of how their business runs and how safe it is," says AON's Armstrong. "ERM can help accomplish this."

Silver agrees. "If you have a comprehensive understanding of your risk, you can manage it better," he says. "Just as importantly, you can communicate this to your insurers so they will understand it."

Another company that works hard to build strong broker relationships is Engelhard Corp. in Iselin, N.J., a chemical engineering technology company. "The biggest risk issue facing the chemical industry is the perception among underwriters that chemicals are bad--that they are a major risk," says Rich Sarnie, director of risk management. As such, according to Sarnie, the first step risk managers should take is to make sure they understand all of their risks and what levels they are at, so that they can convey these to insurance partners.