Module 1

Risk Concepts

Learning Objectives:
• Explain the concept, nature, and different types of risks in maritime and logistics
operations.

• Analyze the influence of human behavior, organizational factors, and environmental

conditions on maritime risk situations.

• Understand the principles and stages of risk management including risk identification,
measurement, control, and financing.

• Evaluate risk exposure in ports, shipping, cargo handling, and logistics systems.

• Apply pre-event, during-event, and post-event perspectives to maritime risk analysis

and operational decision-making.

Introduction
Risk can be identified, measured, controlled and financed; this is the bedrock of the discipline
of risk management. This task can be approached mechanically in terms of identifying a
problem, finding a solution and then applying it. However, the individual risk problem is part
of a complex risk situation where the physical circumstances, the attitudes, knowledge and
motivation of the players and the social circumstances all interact.

The risk management practitioner must therefore have good working knowledge or risk
concepts and especially people and risk. At first sight it can be a daunting problem as risk is
ubiquitous, and the potential amount of detail involved is unlimited. Therefore, concepts and
structure are important tools in understanding and managing risk. In this chapter we look at
some risk ideas.

Risk Definition and Concepts

A good starting point is the meaning of "risk", defined by the Concise Oxford Dictionary as
"hazard, chance of bad consequences, loss etc., exposure to mischance". So risk is something
or some event that can cause harm, or loss. But risk is not always loss causing and some risks
cause both loss and gain (usually to different people as with the extra work that a repairer gains
after a bad storm.

Risks can be of different types. They maybe physical, causing direct harm or damage, or social,
causing loss of reputation or damage to self-esteem. The objects affected by the risks equally
vary from physical property and people to non-physical property such as ideas and reputations.

Trying to put risk in the widest possible framework it could be considered as future uncertainty
or anything that could occur to prevent the expected or planned future happening. The context
will thus depend on the circumstances, it might be safely crossing the road, building a new
factory, carrying out an operation, arranging an election or making a friend.

1
From here, the factors in risk can be considered. Some are physical and are understandable
within the context of physical laws discovered by past generations. A distinction has to be made
between the risk that is natural such as an earthquake and the effect of the risk on man made
situation or property. With sufficient care and knowledge the impact of earthquakes can be
reduced by thoughtful siting of buildings and the incorporation of earthquake-resistant features
in the design.

Sometimes the risk is not conscious. One can assume that the original use of polyurethane foam
in cushions (which gives many advantages), did not consciously ignore the poisonous gas
hazard from burning furniture.

There are additional layers of risk. The circumstances of an individual accident or fire may not
be foreseen and sometimes may not be foreseeable. The new risk situation arises from a
combination of circumstances.

As well as the peculiar physical circumstances of a loss situation there is the behaviour of those
involved. This maybe knowledgeable or unwitting, accidental or deliberate. It may have
objectives that are aimed at good results, aimed at causing harm, or the individuals concerned
maybe indifferent to the possibility of harm. There are many other aspects of human behaviour
such as concern or indifference that directly influence the outcome of a risk situation.

Because of the infinite number of possible circumstances and combinations it is perfectly

possible for well intentioned measures to have the opposite effect. Often a well-meant action
results in unpleasant and occasionally horrific consequence that are not foreseen.

The range of possibilities and eventualities points to the knowledge tools needed by the risk
manager which include, not necessarily in order of importance.

- Physical sciences,

- Finance and economics,

- Statistics,

- Human behaviour, and to some extent many other subjects.

Risk Management
Risk management can be seen as a collection of techniques used in a co-ordinated and flexible
manner. It is essentially a multi-disciplinary process where different skills and disciplines are
brought together in risk problem solving. How it is applied will depend on many factors
including:

- Individual levels of knowledge and awareness;

- Management and individual style and inclination;

- Operational capability of the firm factory, team or individual;

- Social style and culture;

2
Furthermore, managing risk within a corporation implies a three-fold approach:

1. Formal system of risk/threat

- Identification anticipation;

- Measurement/evaluation,

- Control,

- Recording information and decisions,

- monitoring results.

2. Adopting measures for economic control that either:

- produce a measurable reduction in the overall cost of risk (insurance plus loss
Control plus self insured losses) and/or

- help to ensure the company's survival whilst minimising the overall cost of
risk control.

3. Establishing management responsibilities for risk.

The potential for applying risk management is very wide. Apart from the insurable risk area it
includes:

- Commercial risk: evaluating trade-off between risk and return;

- Political risk: recognising threats in the environment and keeping the company
in balance;
- Social risk: dealing with risk problems in a social context;

- Project risk: ensuring on-time, on-budget performance;

- Computer risk: the special vulnerabilities in EDP (Electronic Data Processing);

- Military risk;

- Personal risk: handling various threats to the individual.

Application in each area will require analysis of the physical situation and consideration of
both the social circumstances and the motivation and attitudes of the players. One of the biggest
problems in practical risk management is the reluctance to recognise that risk management
performance is closely related to organisational competence and objectives. This means that it
is difficult to solve risk management problems in a badly managed company and that any risk
management activity may create considerable conflict. It is not a problem peculiar to risk
management; many areas of management produce a conflict between personal and
organisational objectives.

3
Tasks in Risk Management
Returning to the opening concepts, the four-stage approach to risk management is not
necessarily compartmentalised:

 Risk identification - the recognition of risks that can threaten the assets and
earnings of business enterprise.
 Risk measurement - estimating the likely probability of a risk occurrence and
its probable or possible severity.
 Risk control - measures to avoid the occurrence of a risk, to limit its severity
and reduce consequences.
 Risk financing - determining what the cost of risk is likely to be or might be and
ensuring that adequate financial resources are available.

Risk Concepts
The hardest of these four tasks is risk identification because it requires a great deal of foresight.
It is all too easy to miss a risk, albeit improbable, that could have disastrous consequences. By
contrast risk control and risk financing are somewhat easier. There is a large range of available
techniques for limiting and eliminating risk with well developed practice. Insurance provides
risk financing for many (insurable) risks; the main problems for a risk manager are
understanding what cover is being made available (due to the complexity of many wordings)
and securing an optimum price.

The essential base of risk financing is the concept of cost of risk which can be measured in
terms of cost of three variables:

- risk control measures;

- uninsured losses;

- insurance.

The variables work together but not necessarily proportionally. Risk control measures may
result in lower levels of uninsured and insured losses. A lower loss level may make possible
lower premiums but these will not automatically be achieved.

Check List: Identifying Risks

Stage Main Area Key Concepts

Key Management
Pre-Event Management selection, business type, consequence
Decisions

Risk Analysis Risk profile, equipment, location, potential

Operational Planning Mode of operation, profit or loss, uniqueness

Market & Competition Relationship, market total size, competitor activity

4
Stage Main Area Key Concepts

Commercial Factors Price acceptability, customers, suppliers

Government restraint, political factors, social factors,

External Environment
physical environment

Technical
Technical developments, inter-relationship
Considerations

Achievable volume and price, cost pattern,

Expectations & Targets
dependencies

Organizational Structure Staffing, competence, commitment

During Operational
Operations compliance, operational standards
Event Performance

Safety & Loss Control Safety control, loss control, risk awareness

Financial Impact Budget consequences, profit and loss

Leadership & Human

Staff decisions, leadership, staff capability, staff level
Factors

Environmental Political environment, social environment, physical

Influences environment

Relationships &
Inter-relationship, all relationships
Coordination

Change & Adaptation Gradual technical change (fast or slow)

Loss & Damage Wastage, occurrence of significant event

Types of Loss Property loss, consequential loss, liability loss

Post-Event Recovery Planning Contingency planning, recovery planning

Event Management Identification of change/events

Alternative Planning Preparation and evaluation of alternatives

Disaster Preparedness Training in disaster handling

Loss Reduction Reduction of actual loss

5
Stage Main Area Key Concepts

Response Capability Preparation in handling emergencies