Chemical Industry: Navigating Emerging Risks and a Challenging Market

For chemical industry risk managers, the stakes are high. Business interruption can be catastrophic. Equipment is expensive. Risk profiles are in a state of flux. And the hard insurance market is driving premium costs up while capacity diminishes.

To shed light on the industry’s risk management landscape, Kozeta Rexha, Client Executive and Chemical Industry Practice Leader at TÜV SÜD Global Risk Consultants joined Peter Roueche, Director of Insurance and Enterprise Risk Management at Ingevity Corporation on an episode of RIMScast – the popular podcast by RIMS. The discussion covered a broad array of topics including emerging risks, mergers and acquisitions, supply chain disruptions, and human error.

Check out the full episode here.

Key insights from the conversation include:

Chemical companies are considering retaining more risk – and Ingevity is no different. Roueche revealed that his organization is evaluating how to distribute his premium budget and scrutinizing cost increases related to asset replacement, business interruption, rate increases, and other factors.

“We are seeing significant increases in premiums, so we are confronted with a decision: do we take larger deductibles? Do we assume a portion of the risk all the way up our property tower?” said Roueche. He further added: “For high-risk companies such as a chemical company, property is typically the largest insurance expenditure, so we must decide where we allocate that money. And on the flip side, we have to mitigate those risks.”

An increasing number of chemical companies are choosing self-insurance, necessitating a firmer grasp of potential property risks. Rexha explained that in the high-hazard space, there “approximately 50% of companies are self-insured” making it paramount for risk managers to be equipped with the necessary tools to curb critical exposures.

Human element exposures are increasing due to employee attrition.  In today’s difficult labor market,  companies are struggling to replace seasoned workers who retire or switch jobs, leading to human error-induced accidents. 

“Companies with strong cultures, succession plans, and process safety management tend to perform better and have fewer incidents and losses,” said Rexha.

To tackle the risk, Ingevity emphasizes on knowledge transfer. 

“I love to talk with new operators about how they're being trained,” said Roueche. “It's a combination of manuals, hands-on training, and shadowing employees that have been on the job for 20 or 30 years.”

Supply chain disruptions continue to delay new equipment deliveries. Although raw materials and product supply chains have stabilized post-pandemic, new equipment delivery is still enduring prolonged interruptions – leading to longer business interruptions.

“Something that may have taken three-to-six months for delivery in the past could take a year to deliver today,” said Roueche. 

Inflation has led to higher property valuations, indicating a critical need for reassessments. If you build a plant for $100 million, you may need to insure it for $300 million so a claim fully pays for rebuilding or replacement costs. It makes insured asset valuations even more important to help companies and carriers understand updated loss expectancies.

“This is here to say. The industry will be dealing with this for a while,” said Rexha.

Boiler and machinery. Rexha estimates that half the losses in the chemical industry stem from equipment breakdown, making it essential to incorporate boiler and machinery risk engineering into any chemical risk management plan.

“Root cause analyses and loss investigations point us to equipment that is not used correctly, not properly maintained, or which has a need for replacing critical control systems,” said Rexha. “Those failures can cause major explosions or fires.”

Mergers and acquisitions are resulting in losses. When two companies merge, issues can arise. problems abound. While the acquiring company might have efficient risk management, the acquired company could have issues that need immediate attention. Risk manager must be part of those negotiations. 

“A lot of big losses occur in the first few months after of an acquisition,” said Roueche. “Risk managers need to be at the table from the start.”

Rexha told the story of the worst loss she saw during her career as an underwriter. After an acquisition, management put new production demands on a plant and cut corners on maintenance. 

“Next thing you know, there was a major explosion – an actual total loss which could have been prevented in the first place,” Rexha explained. “Getting a seat at the table early on is critical to understand the risks and exposures.”

Choosing property risk engineering minimizes losses. Property risk engineering is a critical service for chemical risk managers. As Rexha stated, "Effective risk engineering can positively impact the bottom line, particularly when the engineering is independent of underwriting."

Listen to the full RIMScast episode here.

For more on chemical risk engineering, click here.