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Business, regulate thyself: Risk management’s proper role in the wake of the Charleston chemical spill

Earlier this week, I read an excellent analysis by Aon’s Rod Taylor of the global liability implications of the January 2014 chemical spill that contaminated the water supply of Charleston, West Virginia, and the nine counties surrounding the city. The chemical spill was national news for days, if not weeks, and, for obvious reasons, remains of strong interest to risk and insurance managers.

I wanted to take to the Aon eSolutions Impact blog to recommend Rod’s analysis to our readers, but also to share a few thoughts about the role that risk management systems technology can play in helping to be aware of the potential for such catastrophic events and manage the potential losses of such an event. I approach this not with the intention of finger wagging, tut-tutting or prescribing a list of “they should haves” with the aid of perfect hindsight. Rather, I present my observations as food for thought for risk and insurance managers (and, perhaps, the C-level executives to whom they report) as they consider the potential losses (both in human and financial terms) that might arise from similar risks and exposures.

Rod leads off his closing, “Lessons Learned” paragraphs with an observation that really got me thinking about the big-picture role that risk management should be playing today at companies of all kinds:

One of the complaints about the Charleston incident was the lack of control regulators had over the operations of Freedom Industries. It is alleged that its facilities were not inspected by any state or federal agency in more than 2 decades, and it was not required to demonstrate financial responsibility before it stored millions of gallons of hazardous chemicals within 200 feet of a river that supplies water to a city and 9 counties.

What Rod reports about alleged regulatory inadequacies is the focus of the discussion I hope to prompt with this blog post. It leads to the question of the extent to which companies choose to regulate, so to speak, themselves—independent of what’s required of them on the local, state and federal levels.

For the sake of argument, let’s assume that neither Freedom Industries nor their insurers were aware of information like this that Rod reports: “The 35,000-gallon tank that leaked was constructed in the 1950s to store gasoline at what was then a petroleum refinery.” How can a company mitigate its risks, and how can carriers properly accept their transferred risk, if such basic risk management information is not captured or, worse yet, is simply not known?

Absent a strict regulatory regime, the only practical conclusion to draw is that it’s incumbent on companies like Freedom Industries to, in effect, regulate themselves by being more active in their risk management policies and procedures. In that respect, I see risk technology as that helping hand to assist risk managers in documenting, analyzing and supporting their decision-making process on which effective strategies they could initiate.

Following are three concrete ways that active risk management, aided by robust risk management SaaS technology, could have helped to mitigate the kind of risks that ultimately led to the Charleston chemical spill:

  • First, as a risk manager for an organization that owns or is a user of contaminate materials, through effective risk technology one can evaluate the possible impact and exposure of a leak in a geographical area by capturing the construction, protection and exposure of property and related assets, like large holding tanks. With this data, the risk manager can deploy risk mapping intelligence tools that use geo-coded coordinates of the property, assets and surrounding area to graphically depict possible exposure to the adjoining community should a contaminate breach the holding tank. 

    But don’t stop there. The risk database should also be the repository for engineering studies relative to water flow, capacity and contaminate strength, which can be leveraged to determine potential worst-case scenarios. The data would be all in one place for a risk manager to evaluate intervention, prevention and insurance-coverage strategies.

  • Second, let’s assume that Freedom Industries knew about the exposure, but action to evaluate and correct fell through the cracks. Risk technology can help prevent these oversights with automated workflows. These monitor and alert risk managers to any lapses in corrective-action projects, timetables, staff accountability and actionable results. Automated monitoring and alerting becomes invaluable as risk managers schedule inspections, record the results of internal audits and assessments, and document the estimated costs of corrective action (and the costs of taking no action!). 

  • Finally, a catastrophic event like the Charleston chemical spill reminds us that enterprise-level risks need to identified and tracked. This includes the strategies decided on by the C-suite to mitigate such exposures.

    By using a scoring matrix and risk categorization, defining enterprise-level risks allows for creation of heat maps that will display the relative importance such risks will have on the company. This will help the risk manager and C-suite prioritize effective strategies to mitigate these risks.

    By the very nature of the risk being enterprise wide, data will be coming in from multiple data points within the organization; flexible consolidation of this data (in other words, data convergence) promotes a unified view of the risk and keeps everyone on the same page. The need to keep tabs on multiple departments that impact an enterprise-level risk clearly supports the need once again for automated workflows that generate alerts when key milestones are not met. By using risk technology in this fashion, risk managers deliver plenty of data to report to the C-suite the company’s progress around minimizing enterprise risks.  

The Charleston, West Virginia, chemical spill—like the West, Texas, fertilizer warehouse explosion in April 2013—should serve not only as cautionary tales to risk managers and their organizations; events like these should also be marshaled as supporting evidence of the need for proactive risk management and the technology tools necessary to support it.

Ken Ancona is a territory vice president with Aon eSolutions, based in the Chicago office. Contact Ken at ken.ancona@aon.com.

RMIS Guide


Apr 4, 2014

 | Originally posted on 

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