Showing posts with label disaster. Show all posts
Showing posts with label disaster. Show all posts

Apr 30, 2010

The LORD and Risk Management

The (2010) Louisiana Oil Rig Disaster (LORD) shows that oil industry Risk Management Plans fail.

In general, Risk Management Plans are focusing too much on Risk Control, too little on Risk Prevention and certainly not enough at Damage Control.

The LORD shows us that a sufficient Plan B is missing. The only 'hope'  in the LORD's current Plan B was the Blow-Out Preventer (BOP) at the bottom of the ocean.

Apart from the question whether that BOP has been tested well: what is Plan C if this BOP would fail, as it obvious does?

Plan C ?
Of course not, we don't need a Plan C. All we need is an adequate Plan B. Plan B should simply have included the installing of two other well tested BOPs at an appropriate distance under sea-level.

Supervisors fail as well
It was only after the LORD's appearance, that the House of Representatives began an investigation into "the competency of the companies' risk management and emergency response plans".

This action is a typical case of:

When the steed is stolen, the stable-door is locked

From all this (above) it's clear that not only Risk Managements Plans are failing, but also the preventive control of those plans by national supervisors.

Why care?
As an actuary you might think: BOPs and an exhausting Plan B are perhaps fine regarding the oil industry, but who needs those instruments in the financial industry?

Unfortunately, the financial industry makes the same mistakes as the oil industry. From a long list, in short, two financial examples:
  • Only after the dramatic fall of coverage ratios in 2009, Pension Funds started to make recovery plans (Plan Bs)
  • Only after Greece's financial crisis and the corresponding decline of the Euro, Europe started thinking whether or not they should help Greece out and developed a Plan B.

Rethinking Risk Management
It's undeniable, we fundamentally need to  rethink and restruct our Risk Management Plans.

Risk Control
First of all we'll have to distinguish more between Risk and Damage. Preventing, reducing and controlling Risk (not just damage!) is key. Testing and supervising (certification!) Risk Management Plans is a must and needs more attention.

Damage Control
Apart from  the probability of a Risk event, Damage Control needs more attention. Here 'Controlling' includes Reducing and definitively Stopping Damage. Both are essential. This implies that a serious Plan B is in place and regularly tested and approved by supervisors. This Plan B should include automatic shut off valves in every line of business and 'triple actions plans' in case a first or second case action plan B unexpectedly fails.

How to deal with Unthinkable Risks?
Moreover, to create effective Risk Management Plans, we have to deal with the issue of "Unthinkable Risks".

No matter how creative you and your organization are, one thing is sure: new 'risks you didn't think of' will always show up . Problem is that - just like the LORD showed us -  you'll only become aware of a new risk after its manifestation; when it's clearly too late.

A Risk Sensitive Mindset
This - however - doesn't mean that you can't deal with unthinkable risks. To manage unthinkable risks you'll have to create a 'Risk Sensitive Mindset' in your organization. It takes employees who are vigilant and empowered to take direct action. Creating such an organization pays off in more than one way, as vigilant employees will also have a nose for new business and sales opportunities.
This way, Risk Management costs are not just unavoidable costs but profitable investments.

The LORD and your own responsibility 
As we seem perfectly capable of managing our own personal life without a fifty-page Risk Management Plan, most likely this type of Employee Risk Attitude Development (ERAD) is the most important (but also most disregarded) part of Effective Risk Management. In this case the LORD can't help us, it'll have to be our own insight and decision to take action to develop risk sensitive and responding employees.

Still not convinced that ERAD is the right way ahead? Imagine what difference we actuaries could have made to the (financial) world if we would have been able to spot and address sub-prime mortgages or the weakness of our ALM models in an early stage.....

Many LORD's blesses and Good Luck with this new view on Risk Management!

Related Links / Resources:
- Government Branches Investigate Louisiana Oil Rig Disaster
- UBC: Case Studies of Engineering Failures
- SKY: Emergency Declared As Oil Approaches US Coast
- Strategic, organisational and risk management context