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SHIPPING RISK MANAGEMENT CHP 01

SHIPPING RISK MANAGEMENT CHP 01. Fundamentals & Terminologies of Shipping Risk Management. Agenda. Different Definitions of Risk Chance of Loss Peril and Hazard Classification of Risk Major Personal Risks and Commercial Risks Burden of Risk on Society Techniques for Managing Risk

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SHIPPING RISK MANAGEMENT CHP 01

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  1. SHIPPING RISK MANAGEMENTCHP 01 Fundamentals & TerminologiesofShippingRiskManagement

  2. Agenda Different Definitions of Risk Chance of Loss Peril and Hazard Classification of Risk Major Personal Risks and Commercial Risks Burden of Risk on Society Techniques for Managing Risk Sources of risk in Shipping Industry Techniques for managing risks in shipping industry

  3. DEFINITIONS OF RISK Risk: Uncertainty concerning the occurrence of a loss/loss exposure Eg; risk of lung cancer for smoker is present because uncertainty is present Risk of damage on the cargo is exist as the uncertainty is present Loss Exposure: Any situation or circumstance in which a loss is possible, regardless of whether a loss occurs.

  4. OBJECTIVE VS SUBJECTIVE RISK • Objective riskis defined as the relative variation of actual loss from expected loss • It can be statistically calculated using a measure of dispersion, such as the standard deviation • Subjective riskis defined as uncertainty based on a person’s mental condition or state of mind • Two persons in the same situation may have different perceptions of risk • High subjective risk often results in conservative behavior

  5. CHANCE OF LOSS Chance of loss: The probability that an event will occur Objective Probability vs. Subjective Probability Objective probabilityrefers to the long-run relative frequency of an event assuming an infinite number of observations and no change in the underlying conditions It can be determined by deductive or inductive reasoning Subjective probabilityis the individual’s personal estimate of the chance of loss A person’s perception of the chance of loss may differ from the objective probability

  6. PERIL AND HAZARD A peril is defined as the cause of the loss In an auto accident, the collision is the peril A hazard is a condition that increases the chance of loss

  7. CLASSIFICATION OF HAZARDS • Physical hazards are physical conditions that increase the chance of loss (icy roads, defective wiring) • Moral hazard is dishonesty or character defects in an individual, that increase the chance of loss (faking accidents, inflating claim amounts) • Attitudinal Hazard (Morale Hazard) is carelessness or indifference to a loss, which increases the frequency or severity of a loss (leaving keys in an unlocked car) • Legal Hazard refers to characteristics of the legal system or regulatory environment that increase the chance of loss (large damage awards in liability lawsuits)

  8. CLASSIFICATION OF RISK Pure and Speculative Risk A pure riskis one in which there are only the possibilities of loss or no loss (earthquake) A speculative riskis one in which both profit or loss are possible (gambling)

  9. DIVERSIFIABLE RISK AND NONDIVERSIFIABLE RISK • A diversifiable riskaffects only individuals or small groups (car theft). It is also called nonsystematic or particular risk. • A nondiversifiable riskaffects the entire economy or large numbers of persons or groups within the economy (hurricane). It is also called systematic risk or fundamental risk. • Government assistance may be necessary to insure nondiversifiable risks.

  10. CLASSIFICATION OF RISK • Enterprise risk encompasses all major risks faced by a business firm, which include: pure risk, speculative risk, strategic risk, operational risk, and financial risk • Financial Risk refers to the uncertainty of loss because of adverse changes in commodity prices, interest rates, foreign exchange rates, and the value of money.

  11. ENTERPRISE RISK MANAGEMENT • Enterprise Risk Management combines into a single unified treatment program all major risks faced by the firm: • Pure risk • Speculative risk • Strategic risk • Operational risk • Financial risk

  12. MAJOR PERSONAL RISKS AND COMMERCIAL RISKS Personal risks involve the possibility of a loss or reduction in income, extra expenses or depletion of financial assets: Premature death of family head Lost of a human life Incurred of additional expenses Unsettled additional expenses Non economics cost Insufficient income during retirement Most workers are not saving enough for a comfortable retirement Poor health (catastrophic medical bills and loss of earned income) Involuntary unemployment

  13. MAJOR PERSONAL RISKS AND COMMERCIAL RISKS Property risks involve the possibility of losses associated with the destruction or theft of property: Physical damage to home and personal property from fire, tornado, vandalism, or other causes Direct loss vs. indirect loss A direct loss is a financial loss that results from the physical damage, destruction, or theft of the property, such as fire damage to a home An indirect loss results indirectly from the occurrence of a direct physical damage or theft loss, such as the additional living expenses after a fire to a home. These additional expenses would be a consequential loss.

  14. MAJOR PERSONAL RISKS AND COMMERCIAL RISKS Liability risks involve the possibility of being held liable for bodily injury or property damage to someone else There is no maximum upper limit with respect to the amount of the loss A lien can be placed on your income and financial assets Defense costs can be enormous

  15. MAJOR PERSONAL RISKS AND COMMERCIAL RISKS • Commercial Risks • Firms face a variety of pure risks that can have serious financial consequences if a loss occurs: • Property risks, such as damage to buildings, furniture and office equipment • Liability risks, such as suits for defective products, pollution of the environment, and sexual harassment • Loss of business income, when the firm must shut down for some time after a physical damage loss • Other risks to firms include crime exposures, human resource exposures, foreign loss exposures, intangible property exposures, and government exposures

  16. BURDEN OF RISK ON SOCIETY The presence of risk results in three major burdens on society: In the absence of insurance, individuals would have to maintain large emergency funds The risk of a liability lawsuit may discourage innovation, depriving society of certain goods and services Risk causes worry and fear

  17. TECHNIQUES FOR MANAGING RISK There are five major methods for managing risk Avoidance Loss control Loss prevention refers to activities to reduce the frequency of losses Safe driving course, stop smoking/healthy diet, periodic inspection, strict security Loss reduction refers to activities to reduce the severity of losses Fire sprinkle system, application of fire resistant material, `

  18. TECHNIQUES FOR MANAGING RISK • Retention • An individual or firm retains all or part of a given risk • Active retention means that an individual is consciously aware of the risk and deliberately plans to retain all or part of it • Passive retention means risks may be unknowingly retained because of ignorance, indifference, or laziness • Self Insurance is a special form of planned retention by which part or all of a given loss exposure is retained by the firm

  19. TECHNIQUES FOR MANAGING RISK • Noninsurance transfers • A risk may be transferred to another party by several methods: • A transfer of risk by contract, such as through a service contract or a hold-harmless clause in a contract • Hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange • Incorporation of a business firm transfers to the creditors the risk of having insufficient assets to pay business debts • Insurance • For most people, insurance is the most practical method for handling a major risk

  20. DEFINITION OF SHIP • A large vessel that floats on water • Generally distinguished from boats based on size • May be found on lakes, seas, and rivers and they allow for a variety of activities • An integral part of modern commercial and military systems

  21. WHAT IS SHIPPING?

  22. THE REALITY OF SHIPPING TODAY • The prime method of carrying commodities • The most environmentally friendly means of transport • It is essentially safe • The cheapest and most cost-effective means of transport for other than high-value

  23. SEAMLESS CONNECTION Port Authority, Customs and other government agents Shipping Lines, Shipping Agents Hauliers, Freight Forwarders, Forwarding Agent Port Klang Community System Warehouse, Depot, Distriparks Other port users, overseas customers, public, students Shippers/ Consignee

  24. Purchase Order Retailer / Importer Vendor / Supplier Confirm Order Status Delivery Cargo Received Booking Received Destination Port FCL & LCL Pack Stock report – in Transit Arrival at POD Origin Port Customs Cleared Shipped on Board Documents Dispached Stock report – in Transit

  25. SHIPPING AND THE GLOBAL ECONOMY • Shipping is the only really cost-effective method of bulk transport over any great distance • More than 90 per cent of global trade is carried by sea. • United Nations Conference on Trade and Development (UNCTAD) estimates that the operation of merchant ships contributes about US$380 billion in freight rates within the global economy, equivalent to about 5% of total world trade

  26. Figure 2.6 World Economy Correlate with Seaborne Volume World GDP Seaborne Trade Volume World GDP World GDP Seaborne Trade Crisis decreases demand Growth of seaborne trade 1973 1st Oil Crisis 1979 2nd Oil Crisis 1991 Financial Crisis 1997 Asia Crisis 2007 Sub-prime Crisis 2001 Dot.com Crisis Source: UNCTAD Trade Development Report 2008, UNCTAD Review of Maritime Transport and China Shipbuilding Economy Research Centre (CSERC) 2008.

  27. FURTHER DISCUSSION • Discuss list of potential risks that might be faced by the shippers

  28. Man Overboard • Fire • Flooding • Abandon Ship • Injury and Illness • Steering Failure • Grounding • Collision

  29. TECHNIQUES FOR MANAGING RISK IN SHIPPING There are five major methods for managing risk Avoidance Loss control Loss prevention refers to activities to reduce the frequency of losses Attending STCW course, marking and put precaution reminder around dangerous area, applying ISPS code for inspection, strict security, wearing PPE in dangerous area.

  30. Loss reduction refers to activities to reduce the severity of losses • Fire sprinkle system, application of fire resistant material, oil spillage response

  31. TECHNIQUES FOR MANAGING RISK • Retention • An individual or firm retains all or part of a given risk • Active retentionmeans the ship owner is consciously aware of the risk and deliberately plans to retain all or part of it • Passive retentionmeans risks may be unknowingly retained because of ignorance, indifference, or laziness • Self Insuranceis a special form of planned retention by which part or all of a given loss exposure is retained by the firm

  32. TECHNIQUES FOR MANAGING RISK • Noninsurance transfers • A risk may be transferred to another party by several methods: • A transfer of risk by contract, such as through a service contract or a hold-harmless clause in a contract • Hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling futures contracts on an organized exchange • Incorporation of a business firm will use credit transferin order to transfers to the creditors the risk of having insufficient assets to pay business debts • Insurance • For most people, insurance is the most practical method for handling a major risk. Eg; Marine Cargo Insurance, P&I, Hull & Machinery

  33. INTERNATIONAL MARITIME ORGANIZATION (IMO) & RISK MANAGEMENT A​​s a specialized agency of the United Nations, IMO is the global standard-setting authority for the safety, security and environmental performance of international shipping. • Its main role is to create a regulatory framework for the shipping industry that is fair and effective, universally adopted and universally implemented. In other words, its role is to create a level playing-field so that ship operators cannot address their financial issues by simply cutting corners and compromising on safety, security and environmental performance. This approach also encourages innovation and efficiency. • Shipping is a truly international industry, and it can only operate effectively if the regulations and standards are themselves agreed, adopted and implemented on an international basis. And IMO is the forumat which this process takes place. The world relies on a safe, secure and efficient international shipping industry – and this is provided by the regulatory framework developed and maintained by IMO.

  34. IMO measures cover all aspects of international shipping – including ship design, construction, equipment, manning, operation and disposal – to ensure that this vital sector for remains safe, environmentally sound, energy efficient and secure. • Shipping is an essential component of any programme for future sustainable economic growth. Through IMO, the Organization’s Member States, civil society and the shipping industry are already working together to ensure a continued and strengthened contribution towards a green economy and growth in a sustainable manner. The promotion of sustainable shipping and sustainable maritime development is one of the major priorities of IMO in the coming years. • Energy efficiency, new technology and innovation, maritime education and training, maritime security, maritime traffic management and the development of the maritime infrastructure: the development and implementation, through IMO, of global standards covering these and other issues will underpin IMO's commitment to provide the institutional framework necessary for a green and sustainable global maritime transportation system.​ 

  35. IMO CONVENTIONS

  36. Most important IMO Conventions • International Convention for the Safety of Life at Sea (SOLAS), 1974, as amended • International Convention for the Prevention of Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto and by the Protocol of 1997( MARPOL) • International Convention on Standards of Training, Certification and Watchkeeping for Seafarers ( STCW ) as amended, including the 1995 and 2010 Manila Amendments

  37. PROVISIONS OF SOLAS 1974 • Technical provisions : standards for construction, equipment and operations of ships • General provisions : Concerning ship –surveys and documents relating to compliance of conventions • Construction - Subdivision and stability, machinery and electrical installations • Fire protection, fire detection and fire extinction • Life-saving appliances and arrangements • Radio communications : incorporates the Global Maritime Distress and Safety System (GMDSS). • Safety of navigation

  38. SAFETY OF LIFE AT SEA(SOLAS) 1974 ….. • Carriage of Cargoes • Carriage of Dangerous Cargoes • Nuclear ships • Management for the Safe Operation of Ships • Safety measures for high-speed craft • Special measures to enhance maritime safety • Special measures to enhance maritime security • Additional safety measures for bulk carriers

  39. PERSONAL PROTECTION EQUIPMENT • Personal protective equipment (PPE) refers to protective clothing, helmets, goggles, or other garments or equipment designed to protect the wearer's body from injury or infection. • The hazards addressed by protective equipment include physical, electrical, heat, chemicals, biohazards, and airborne particulate matter. Protective equipment may be worn for job-related occupational safety and health purposes, as well as for sports and other recreational activities. • "Protective clothing" is applied to traditional categories of clothing, and "protective gear" applies to items such as pads, guards, shields, or masks, and others.

  40. The purpose of personal protective equipment is to reduce employee exposure to hazards when engineering and administrative controls are not feasible or effective to reduce these risks to acceptable levels. PPE is needed when there are hazards present. PPE has the serious limitation that it does not eliminate the hazard at source and may result in employees being exposed to the hazard if the equipment fails. • Any item of PPE imposes a barrier between the wearer/user and the working environment. This can create additional strains on the wearer; impair their ability to carry out their work and create significant levels of discomfort. Any of these can discourage wearers from using PPE correctly, therefore placing them at risk of injury, ill-health or, under extreme circumstances, death. Good ergonomic design can help to minimise these barriers and can therefore help to ensure safe and healthy working conditions through the correct use of PPE.

  41. Personal protective equipment ranks last on the hierarchy of controls, as the workers are regularly exposed to the hazard, with a barrier of protection. The hierarchy of controls is important in acknowledging that, while personal protective equipment has tremendous utility, it is not the desired mechanism of control in terms of worker safety.

  42. INTERNATIONAL CONVENTION FOR THE PREVENTION OF POLLUTION FROM SHIPS, 1973 (MARPOL) • International Convention for the Prevention of Pollution from Ships (MARPOL) • Adoption: 1973 (Convention), 1978 (1978 Protocol), 1997 (Protocol - Annex VI); • Entry into force: 2 October 1983 (Annexes I and II).

  43. PROVISIONS OF MARPOL • Prevention of pollution by oil • Control of pollution by noxious liquid substance • Prevention of pollution by harmful substances carried by sea in packaged form • Prevention of pollution by sewage from ships • Prevention of pollution by garbage from ship • Prevention of air pollution from ships

  44. STCW • International Convention on Standards of Training, Certification and Watch keeping for Seafarers (STCW) • Adoption: 7 July 1978; Entry into force: 28 April 1984; Major revisions in 1995 and 2010

  45. STCW • The 1978 STCW Convention was the first to establish basic requirements on training, certification and watchkeeping for seafarers on an international level. • Previously the standards of training, certification and watch keeping of officers and ratings were established by individual governments, usually without reference to practices in other countries. As a result standards and procedures varied widely, even though shipping is the most international of all industries. • The Convention prescribes minimum standards relating to training, certification and watch keeping for seafarers which countries are obliged to meet or exceed.

  46. STCW • The 1995 amendments entered into force on 1 February 1997. One of the major features of the revision was the division of the technical annex into regulations, divided into Chapters as before, and a new STCW Code, to which many technical regulations were transferred. Part A of the Code is mandatory while Part B is recommended.

  47. STCW • STCW Convention chapters • Chapter I: General provisions • Chapter II: Master and deck departmentChapter III: Engine departmentChapter IV: Radio communication and radio personnelChapter V: Special training requirements for personnel on certain types of ships Chapter VI: Emergency, occupational safety, medical care and survival functionsChapter VII: Alternative certification Chapter VIII: Watch keeping

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