Principles Of Risk Management Insurance: Analyzing The Tianjin Fire Explosion

Background of Tianjin Fire Explosion

Discuss About The Principles Of Risk Management Insurance.

Tianjin fire explosion was one of the worst manmade disasters in Chinese history(Fu, Wang, & Yan, 2016).It was as a result of a series of explosions which happened in one of the container stores at the port of Tianjin which left over one people dead and more than one hundred firemen injured(Fu, Wang, & Yan, 2016).The explosions occurrence of the explosion was in series and with the first two explosions happening in just 30 seconds from the other; the second explosion had a bigger magnitude involving the detonation of close to 800 tons of ammonium nitrate(Popov, Lyon & Hollcroft, 2016).Figure 3 and 4 show images of Tianjin port after the explosion. The main course of the explosion was not apparent at first, although through an investigation by Chinese authorities, it was cited that the explosion was triggered by overheated chemical containers.

The explosion led to huge human and economic losses for the industry and the society as a whole. It also revolutionized the insurance industry but sending a warning on the need and usefulness of risk identification and risk management with regards to hazardous chemical substances. The usage of such chemicals has also been a point of concern among the public as a result of the explosion. Majority of the hazardous chemicals, however, are indispensable ingredients and additives which are of great benefit to the society. Production, warehousing, and transportation of such chemicals are thus unavoidable. The main priority in risk management and control then is the correctness in identifying and understanding dangerous chemicals so as to manage them in a scientific manner.

By analyzing, reviewing and getting an insight of the Tianjin explosion, many companies will be able to apply more safety standards and measures in their day to day operations. More research will be done to ensure a proper understanding of various chemicals and their reactiveness when exposed to different environments. In addition, insurance companies have been given a blueprint on risk management and their ability to identify, reduce and control risks has taken a new turn through enhanced underwriting and risk controls.

According to Sun, (2015), a risk is defined as the potential loss emanating from a given action or lack of action .The choice of an action is the main determinant of an outcome. A risk is illustrated by two features of a possible future and the probability of its occurrence as well as the resulting consequence of the event if it happens. Risk can be said to be undefined if the chances of occurrence cannot be ascertained. Figure 1 shows how risks can be rated based on their severity. Human beings are normally at the forefront and on the hidden side of events and thus human factor is an element of driving force in decision making. System engineering management risks are those associated with the process of system development. Risk management in a very dynamic environment is an essential requirement if reaching strategic advantage of a company is to be achieved. Risks associated with the system can generally be traced to the attainment of customer requirement cycle. Product risk encompasses both final product risks which relate to the performance and system cost while enabling products represent those products that produce, support, test and maintain the system. Risks relating to the management can either be technical management risks or those triggered by external influences. Those concern with internal management are basically the ones dealing with schedules, workflow, resources, timely deliveries, critical operations as well as the availability of qualified personnel. On the other hand, risks pertaining external factors fall under resource availability, regulatory requirements including the visibility of the program.

The Importance of Risk Identification and Management

However, risk can be detrimental to any business operation and in case an entity is hit by an eventuality that it had not planned for, time, costs, as well as a company’s reputation, could be on the line. This, therefore, makes Risk Analysis a key element in an environment where risk is likely to be experienced. Risk analysis referred to as the process of defining and analyzing the perils to businesses, individuals and government agencies posed by human-caused and natural adverse events (Popov, Lyon & Hollcroft, 2016). .A proper risk analysis provides a clear insight into the identification and understanding the risks that someone could potentially face in the line of duty. Consequently, this too can help one to manage these risks and reduce their impact on plans. It is a process which aids in identifying and managing potential problems that could forestall major business projects.

To carry out a risk analysis, potential threats need to be identified and an estimation of the likelihood of these threats to materialize need to be done. The process can be complex and challenging as detailed information needs to be drawn in the form of project plans, security protocols, financial information, marketing forecast and any other relevant information. Nonetheless, it’s a key planning tool that saves much of the money, time and company’s image. Reports on risk analysis can either be qualitative or quantitative. Quantitative risk analysis involves numerical attempt to determine the likelihood of various unfavorable events and the possible extent of losses in case such event occur. Qualitative risk analysis, on the other hand, does not concern itself with numerical probabilities of damage by rather in defining threats, investigating the extent of exposure and devising forestalling measures should an eventuality takes place. In probing into the explosion at Tianjin Port, three components of Risk analysis need to be examined in-depth. They include; an assessment of risks, management of risk and effectively communicating risks factors.

This is defined as a scientific process comprising hazard identification, characterization, risk characterization and exposure assessment (Aven & Zio 2018). Risks need to be established correctly before any action is taken up by an organization because a wrong list or incomplete list of risks can prove to be damaging. Any risk identified either through a thorough research or by default have some chance of influencing the normal functioning of the organization. After the process of risk identified is over, it is important that organizations put them in categories especially in the case that the risk identification process produces many risks which due to their number may prove futile to manage them (Frigo, 2011).

Understanding Risk and Risk Analysis

A risk assessment will help cover the workers in an organization as well as ensuring a compliance with the existing laws. As for the point when to conduct a risk assessment, it should be done before employees or any other person start working on any activity that presents a risk of physical injury or ill-health. To acquire competency in identifying risks, someone from the organization needs to attend a risk assessment training in order to gain skills such as those of identifying hazards and the ability to place risks in their categories based on the severity. With these abilities, a sustainable, sufficient and suitable risk assessment will be assured by the company.

There is no fixed template on how risk assessment should be conducted per se, but there are certain general principles that ought to be followed. As shown in Figure 2, these steps include Identification of hazards, determining individuals likely to be affected and how, evaluating the risks and deciding on control measures, recording findings and implement them and reviewing assessment and update them if necessary (Frigo, 2011).

A hazard refers to any source of potential harm, damage, or unfavorable health effects on someone or something (Popov, Lyon & Hollcroft, 2016). To clear a clear view of a hazard, one needs to get proper knowledge of the difference between a hazard and risk. A hazard is referred to as an element with great potential to trigger harm while the term risk, on the other hand, is the likelihood of that potential peril being experienced (Richards, 2011).Hazards can be identified by the use of various methods like taking a walk around the workplace or probing from employees.

At the Tianjin port, a number of hazards were imminent before the devastating explosion. According to authorities, there was close to 700 tons of highly reactive and deadly chemicals stored in the warehouse that exploded; much more than what the warehouse was licensed to store (Singleton, 2016). The warehouse had stored dangerous chemicals such as ammonium nitrate, calcium carbide, and potassium nitrate. Ammonium nitrate is soluble in water and is sometimes used as a fertilizer. It is a highly explosive substance and any heat may trigger the chemicals to undergo a combustion and explode. Potassium nitrate is also a highly reactive chemical and apart from its use as food preservation and fertilization, it is also used as a main component of gunpowder. In the same way, this substance is highly reactive and it decomposes at some level of temperatures. Calcium carbide which is mostly used as a raw material for the production of polymer polyvinyl chloride has a great resemblance to acetylene in terms of the storage form. In solid form, it reacts with water to produce calcium hydroxide and acetylene which a highly flammable. Given the above, it can be confidently determined that proper hazard identification procedures were neglected at the Tianjin Port. The chemicals should have been stored way apart from each other in consideration of their nature and stability. It is evidently clear that with the combination of the mentioned chemicals, the disastrous explosion was inevitable.

Risk Assessment Process

Once the process of hazard identification is complete, an understanding of the people in the warehouse or the public and how they are likely to be affected need to be realized(Richards, 2011).At Tianjin Port, the management should have asked employees about their views on what they think were the risks at the warehouse. Some of them may have noticed things or events which were abnormal and may have had some idea of controls. With proper identification of the groups of people who were likely to be harmed as a result of each hazard, the management at the warehouse would have identified the best way of controlling eminent risks.

After completing the process of identifying hazards and determining the people who could potentially suffer in the event of a calamity, the management at the Tianjin port would have then researched on ways of protecting them from harm. The hazards could either be eliminated in totality or the risk identified and controlled in a manner that in its presence, the likelihood of injury is nil. The aftermath of the explosion did not only raise important questions about the safety of chemical handling and storage facilities but also the issues surrounding the presence of chemical sites near places of residence(Mitchell-Wallace, Jones, Hillier, & Foote, 2017).The warehouse was located about three kilometers from a densely populated coupled with concentrated houses for migrant workers just a few kilometers(Mitchell-Wallace, Jones, Hillier, & Foote, 2017).From this information, it’s clear that the law was not enforced as it did not expressly prohibit the location of hazardous sides within a close physical proximity to residential sites. Control measures would be to pass laws that clearly determine where a company dealing in highly flammable substances can be located.

After findings have been determined and analyzed, it is prudent that they are laid down. Legal requirements should be noted while a clear understanding of the identified perils, the individuals likely to be harmed and also plan on how to mitigate risks should be demonstrated. From the report, a proper communication and management of risk in the company should be achieved. For the case of Tianjin port, a proper and accurate list of hazards should be presented in the order of importance for action and training of employees as well as preparing action plans with regards to its location.

Since workplaces are dynamic, and they are prone to introduction of new equipment, procedures, and substances which could bring on board new hazards. In the case of Tianjin, a thorough review of the ongoing work should be done on a continuous process. It should be ensured that the risk assessment does not change lest a calamity takes place.

Hazard Identification and Evaluation

Risk management is defined as the process of weighing policy alternatives through consultations with all the interested parties in consideration of risk assessment and other issues relevant to the protection of consumers, promotion of fair trade practices and selection of relevant prevention and control options(Mitchell-Wallace, Jones, Hillier, & Foote, 2017).It is the identification, assessment, and prioritization of risk and the succeeding economical application of funds to monitor, minimize and control the impact and probability of losses(Zhao, 2016). Valuable risk management activities will help in the creation of value and consequently should be the backbone of decision-making processes. Risk management strategies include risk avoidance, mitigation, risk transfer, and retention. An illustration of the risk management strategies is shown in Figure 3.

Risk avoidance is a term used to refer to the act of eliminating perils, activities, and exposures that could be detrimental to an organization. At the Port of Tianjin, risks could be avoided by not keeping highly flammable and reactive chemicals together at the warehouse. Because it is technically impossible to eliminate all the risks, a risk avoidance strategy is used to identify as many threats as possible so as to avoid those which are costly and present more severity in an event of an occurrence. It is a way of trying to minimize to the lowest levels possible the effects of threats. In Tianjin, the risk could be avoided through proper education and awareness.

Businesses may choose to manage risks by way of mitigation. It is defined as taking steps to minimize adverse effects (Menoni, & Margottini, 2011).  This method is meant to lower the negative effect of a particular risk and thus it is a common application in cases where risks are unavoidable. Even though extreme disasters such as that of Tianjin are not common, disruption in business operations is something which occurs frequently as a result of an unfavorable event. For instance, in the case of Tianjin, a proper research would have been conducted to determine the effect of the chemicals and the cost of an explosion. In addition, the location of the warehouse should have been located in a way that any form of an explosion would not be able to reach residential places. Having good contingency plans at Tianjin port would have paved way for lower perils and disasters. From identification of alternatives ways of chemical storage facilities to training of warehouse staff members on risk areas, scenario planning could be used at the port to reduce uncertainties and consequently forestall risks. This strategy helps businesses eliminate the risk of capital loss, although some degree of risk still prevails (Richards, 2011).

One of the risk management strategies is risk transfer and entails transferring risks from one party to another through payment of premiums (Iverson, 2013). An example of risk transfer is the use of an insurance policy. Risk transfer places the burden of risks and responsibilities on parties such as the insurance companies who have got the ability to insure the risk involved. From the Tianjin explosion, it is estimated that the loss could be as high as 3.5 billion U.S dollars (Mitchell-Wallace, Jones, Hillier, & Foote, 2017).Because of the significant cost of assets involved at the facility, it was prudent for the management at Tianjin to take insurance policies to cover their business and properties from perils.

This is a situation where a business decides to the unavoidable risk internally either due to the unavailability of insurance option or its purchase is too expensive compared to the risk. It can also be applied when it is economical to handle the risk internally other than paying premiums. Retained risks are usually those with high frequency but low severity. In Tianjin, an analysis of the risks should have been done to determine what could be issued and those which had no commercial insurance.

Risk communication is referred to as proper dissemination of real-time data, advice, and opinions among experts and individuals who are at the risk of threats to their economic, health or social well-being (Richards, 2011). It entails the provision of salient information on risk assessment reports and risk management conclusions. With proper risk analysis, communication should have been passed out to workers at Tianjin warehouse regarding the risks and signs they ought to watch out for. This would have most likely resulted in hazard identification before the explosion struck. A sound understanding of people’s perceptions is required as well as their knowledge, concerns, and practices.

		RISK RATING KEY	LOW	MEDIUM	HIGH	EXTREME
	0 ACCEPTABLE	1 ALARMING	2 UNACCEPTABLE	3 INTOLERABLE
	Okay to Proceed	Mitigation measures needed	Find support	Hold the process
	S E V E R I T Y
ACCEPTABLE	TOLERABLE	UNDESIRABLE	INTOLERABLE
Has a minimal effect on an Event.	Effect of an occurrence is felt but not critical to the outcome.	Has serious impacts on the course of action and outcome.	Could potentially breed disaster
L I K E L I H O O D	IMPROBABLE	LOW	MEDIUM	MEDIUM	HIGH
Low likelihood of risk occurrence	1	4	6	10
POSSIBLE	LOW	MEDIUM	HIGH	EXTREME
High likelihood of risk occurrence	2	5	8	11
PROBABLE	MEDIUM	HIGH	HIGH	EXTREME
Risk will occur	3	7	9	12

 

Conclusion

In conclusion, a risk is unavoidable completely in all business or personal activities. It is a normal existence condition with the probability of an unfavorable future reality which may or may not happen (Aven & Zio, 2018).Despite the fact that the Tianjin explosion is history now, it provides an insight into the need for professional risk management and proper underwriting skills. A coordinated approach among the insurer, the insured as well as the government in establishing an all-inclusive risk management system and an environment that lays great emphasis on risk management. Several recommendations can be made with regards to the explosion with the main aim of creating general awareness through risk management education and training in China. Because there were was a wide range of dangerous chemicals at the warehouse, a comprehensive understanding of their nature would have given the workers an idea of identifying and controlling the risks. Also, the rules and prevailing laws in China should be effective enough to forestall risks that could lead to magnificent disasters as witnessed in Tianjin.

Based on the analysis, findings, and conclusions of the study on Tianjin explosion, below are some of the recommendations to be considered.

1. All areas need to be kept as clean and tidy as it possibly can be.
2. Highly reactive and flammable materials need to be separated from each other as well as far from sources of ignition.
3. Hazardous substances and compressed gases ought to be stored in appropriate conditions outside the main buildings.
4. In the event that hazardous substances and compressed gases are stored in buildings, the quantities of those substances should be reduced as much as possible and they should be stored in secured storage areas.
5. Action points identified by the risk analysis techniques need to be addressed within a given time frame so as to forestall other possible eventualities.

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