Chemical Industry Risk Management: Market Trends Report

Risk management in the chemical industry is going through rapid transformation due to several internal and external factors. Let's explore the specific trends, from self-insurance to the rising need for property risk engineering.

Risk Retention and the Rise of Self-Insurance in the Chemical Industry

Escalating insurance premiums are pushing chemical companies to explore retaining more risk or choosing self-insurance. The hardening insurance market with increasing costs and decreasing capacity is leading firms, especially those in high-risk sectors, to take matters into their own hands. This shift calls for risk managers to have a solid understanding of potential property risks and the requisite risk engineering skills in the chemical industry to handle these exposures effectively.

The Human Element Risk in Chemical Industry and Workforce Evolution

The human element presents a formidable challenge within the risk management space. Rapid workforce turnover can lead to an experience gap, increasing the potential for accidents induced by human error. Knowledge transfer through manuals, hands-on training and employee shadowing can address these challenges, reducing the impact of the evolving workforce.

Chemical Industry Supply Chain Disruptions & Business Interruption

Supply chain disruptions, specifically the delayed delivery of new equipment, extend the duration of business interruptions in the chemical industry, adding to the burden of companies already dealing with a complex industry. Investment in supply chain resilience and alternative sourcing strategies can reduce potential bottlenecks, underlining the importance of facilities management in the chemical industry.

Property Risk Engineering in the Chemical Sector & Uninsured Losses

Inflation-induced higher property valuations necessitate a reassessment of insured asset valuations. At the same time, the concern of uninsured losses, growing faster than insured losses, underscores the value of unbundled risk engineering in the chemical industry. This approach allows risk engineers to make impartial recommendations for all perils, whether they fall under the insurance deductible or not.

Maintenance Management in the Chemical Sector: Boiler, Machinery & Equipment Breakdown

Equipment breakdown contributes to a significant proportion of losses within the chemical industry. Maintenance management in the chemical sector can help prevent catastrophes caused by incorrect usage, inadequate maintenance, or delay in replacing critical control systems. Incorporating boiler and machinery risk engineering into risk management plans can mitigate these exposures.

Chemical Industry Mergers and Acquisitions (M&As)

M&As in the chemical industry can result in substantial losses if not managed carefully. Including risk managers in the negotiation and integration processes can be invaluable in identifying and addressing potential risks and exposures early on, preventing significant losses post-acquisition.

A Shift to a Bifurcated Chemical Industry Insurance Market

The chemical industry is witnessing a shift towards a bifurcated insurance market, especially in areas prone to natural hazards. This situation has left chemical companies in those areas facing tough insurance renewals exploring alternative risk transfer mechanisms. They are making investments in resilient infrastructure, early warning systems, and disaster response planning to lower risk profiles and possibly manage premiums.

10 Takeaways for Chemical Industry Risk Managers

1. Implement Independent Risk Engineering: With uninsured losses outpacing insured ones, it's crucial for chemical companies to consider independent risk engineering. This practice involves conducting a thorough examination of all potential perils, including those that fall under the insurance deductible. Independent risk engineers can provide impartial recommendations for loss prevention, helping companies to better understand their risk profile and develop effective mitigation strategies.

2. Re-Evaluate Risk Retention Strategies: Given the escalating cost of premiums, it's essential for chemical companies to analyze their risk retention strategies. This process should include a detailed assessment of the company's financial health, the potential impact of losses such as asset replacement and business interruption costs, and an understanding of the company's risk tolerance. The goal is to identify the level of risk that the company can comfortably retain while ensuring that it is adequately protected against catastrophic losses.

3. Explore Self-Insurance: Self-insurance in the chemical industry is becoming an increasingly utilized strategy. This approach requires risk management teams to be well-equipped with the necessary tools and knowledge to handle potential property risks effectively. This could include investments in predictive risk modelling and an increased focus on risk prevention. Additionally, a well-structured self-insurance plan can help companies save on premiums while maintaining control over their risk management processes.

4. Proactively Address the Human Element: With the changing dynamics of the workforce, chemical companies must address the human element risk proactively. This could involve investing in comprehensive training programs that enhance safety awareness and foster a culture of risk mitigation. Moreover, implementing knowledge transfer strategies, such as mentoring programs, can ensure that critical skills and knowledge are not lost when experienced employees leave the organization.

5. Boost Supply Chain Resilience: Continued disruptions underline the need for resilient supply chains in the chemical industry. To achieve this, companies should assess the risk associated with each supplier, establish alternative sourcing strategies to minimize dependence on a single supplier, and leverage advanced analytics to predict and mitigate potential interruptions. Having a robust supply chain management framework can significantly reduce the risk of business interruption.

6. Reassess Insurance Asset Valuations: Inflation and other market factors can impact property values, leading to outdated insurance asset valuations. It's essential for these valuations to align with the updated loss expectancies to ensure comprehensive coverage of rebuilding or replacement costs. Regularly updating these valuations can help companies stay adequately insured and prepared for potential loss scenarios.

7. Strengthen Maintenance Management in the Chemical Sector: Regular maintenance checks, timely replacements, and comprehensive operator training can help prevent major incidents such as equipment breakdowns, which account for a significant proportion of losses within the chemical industry. By incorporating boiler and machinery risk engineering into their risk management plans, companies can ensure the longevity of their equipment and the safety of their operations.

8. Participate Proactively in M&As: Risk managers should be part of the M&A negotiation and integration processes from the onset, identifying potential risks and exposures. Their input can help guide decisions, prevent significant losses post-acquisition, and ensure a smoother integration process.

9. Prioritize Knowledge Transfer: As the chemical industry faces an aging workforce, it's crucial to ensure that critical skills and knowledge are passed on to newer employees. This can be achieved through mentoring programs, written manuals, and practical training. A well-structured knowledge transfer program can reduce the risk of errors and improve overall safety.

10. Adjust to the Bifurcated Insurance Market: Chemical companies, especially those in high-risk NatCat regions, must adapt to the bifurcated insurance market. As carriers limit their coverage or increase their premiums, companies need to explore alternative risk transfer solutions such as self-insurance or forming captive insurance companies. Additionally, investing in robust risk mitigation strategies, including resilient infrastructure and disaster response planning, can help lower risk profiles and keep premiums in check.

A Proven Track Record in Risk Reduction

TÜV SÜD Global Risk Consultants (GRC) is well positioned to aid risk managers in the chemical industry with their vast experience and resources, providing tailored strategies to identify and mitigate risks. We have delivered impressive results in the chemical and energy sector. Since 2004, we have achieved $51.2 billion in loss estimate reduction for their clients, with 8,847 facility inspections conducted since 2007 and a total of 27,745 recommendations made to improve risk management processes since 2003.

TÜV SÜD GRC offers effective strategies for managing fire and explosion risks, which are paramount in the chemical industry. We assess multiple potential sources of these risks, from flammable and combustible liquids to human error, and provide tailored risk mitigation strategies.

Our engineers work closely with clients to understand their unique businesses, process safety needs, and personal protective equipment (PPE) requirements. We also provide Boiler and Machinery Engineering experts to assess high-pressure equipment and develop property risk engineering plans to mitigate associated risks.

What can GRC do for your company? Contact us to find out.