'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.

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.

"Second, find underwriters and other insurance partners who are willing to take the time and make the effort to learn and understand your risks," says Sarnie. How long does it take to determine whether the underwriter or other insurance provider is going to be willing to learn and to work with you? "About 30 minutes," says Sarnie. "If they're not paying attention and asking intelligent questions from the very beginning, then you know you have the wrong partner."

Third, once you find willing learners, spend time educating them to the fact that the chemical industry is one of the safest of all industries. "Don't talk down to them, but explain things in ways they can understand and that they can compare to other types of risk they see day to day," says Sarnie.

An important element to success, he also says, is to develop long-term relationships--and ones not based on price. "The risk manager who goes to market every year and looks for the best price will end up in trouble," he says. You need to develop and nurture relationships, in good times and bad. This can take years to accomplish. It involves face-to-face meetings, and even bringing insurance people to your facilities. "Last year, we invited all of our property underwriters to one of our locations," he says. "They got first-hand experience instead of just reading about things on a piece of paper. What they learned was that we run a safe operation."

Once you do all of this work, what can you expect? Sarnie expects more than just generic coverage. He expects customized coverage. "Once I've taken the time to explain the risk, I don't want an off-the-shelf product," he says. "I expect terms to be customized around our specific risks." In addition, the in-person visit also ended up getting Engelhard better deals on its insurance.

While many risk managers and experts encourage long-term broker relationships, others question the wisdom of doing so, especially considering the events in the marketplace these last three years. "Property insurance doesn't seem to be an issue for chemical companies," observes Richard Inserra, assistant treasurer and director of risk management for Rohm and Haas in Danbury, Conn.

"There seems to be enough capacity available, and pricing is improving." However, Inserra says, there is some concern over the availability of excess liability coverage, particularly when it comes to alternatives for the first level of excess coverage. "This has contracted over the last couple of years," he says. "For this and other reasons, a lot of risk managers have become more cynical about underwriters."

Inserra remembers the days when underwriters talked about long-term relationships. "As soon as the market goes hard, though, they toss you out on your ear," he says. "I don't think there is any loyalty on the part of underwriters anymore. I used to try to establish these relationships, but once the market turned hard, I didn't see much reciprocity.

HEIGHTENED SECURITY

Scott Berger, director of the Center for Chemical Process Safety at the American Institute of Chemical Engineers in New York, is one person who doesn't think much has changed in the last 10 to 15 years related to chemical risk issues. "About the only thing that has changed is that companies are thinking a lot more about the security of chemical facilities," he says. "If there is a terrorist strike on a chemical facility, I think security efforts in this area will increase even more."

Gary Wisniewski, a vice president in the Industrial Clients Division of Delta Environmental Consultants, agrees with the new emphasis on security. "The events of Sept. 11, 2001 significantly changed the world for chemical companies," he says. "One reason is that, when renewing their insurance, they have to deal with the terrorist exclusions in a lot of the policies." In addition, they are being required either by statute or by their insurers, to complete facility vulnerability assessments.

Getting their arms around security and terrorist risk issues can be frustrating, though, according to ABS's Arendt. "Now and into the future, security issues will be significant," he says. The reason is that managers still have to ask and answer basic risk questions: What can go wrong? How likely is it? What are the consequences? Then you have to decide what to do about it.

"The problem is that we really don't have a clue about how to answer the frequency question, which is critical to quantifying what needs to be done," he says. "This ends up forcing companies to make some fairly significant monetary investments for security on the basis of the weakest risk information we've ever had to deal with."

A CLOUDED FUTURE

With the challenges of ERM, broker relationships and security issues, it can be easy for chemical industry risk managers to overlook a new challenge that will begin making it self known in the not too distant future--the so-called "brain drain." "The loss of organizational memory in the chemical industry is going to become a significant problem," says ABS's Arendt.

Berger agrees. "In 2011, the first of the baby boomers will hit 65 and start retiring," he says. Of course, retirements can begin to occur even earlier. "As a result, we will begin losing experience at this point, so it will be important for the industry to make sure critical knowledge is transferred from the 'wise gray heads' into the next generation," he says.