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Rising and volatile property and business interruption rates are a problem for any risk manager, but that was particularly true for Brian W. Merkley as global director of corporate risk management with Salt Lake City-based chemical manufacturer Huntsman Corp., which has more than 100 manufacturing and research and development facilities in more than 30 countries.
The solution was a multiyear program with Norwood, Massachusetts-based FM Global, which has led to significantly reduced costs, Mr. Merkley said.
In 2009, the company, which has about 16,000 workers, launched a due diligence process with FM Global “to really try and get a clearer link between the property risk improvements made, or looking to be made, and the rates that were being charged for the insurance,” Mr. Merkley said.
This involved “thinking about things that you do to prevent a loss from occurring in the first place, or being able to control it if an incident occurs.”
“For example, we manufacture chemicals at high temperatures and often at high pressures, and if there's a loss of containment or a leak, and product or raw material escapes and finds a source of ignition, you can have a very serious incident,” Mr. Merkley said.
The question was that “we were making capital improvements to prevent the losses from happening in the first place, but if all those processes failed, what were we going to do to better control it, and do it on a fixed, automatic system?”
This also involved controlling “any potential sources of ignition, including ways to protect and operate electrical controls or open flames,” factors that have to be present for a fire explosion to occur.
“It takes a lot of effort to get that significant amount of investment made,” Mr. Merkley said. “We spent a significant amount of investment in time and in communicating and educating folks on the value of this long-time view.”
Huntsman's senior leadership, including President and CEO Peter Huntsman, “recognized the value of this kind of approach,” Mr. Merkley said.
Under the long-term agreement with FM Global, “we agreed to spend $10 million a year, and up to $55 million in total over about five to six years, making certain risk improvements, and then in return they would reduce the rates they were charging for property insurance,” Mr. Merkley said.
“We've now completed a full four years of that long-term agreement, and it's worked wonderfully. Not only have we seen the rate reductions that were promised but, more importantly, we've been making significant risk improvements at our sites,” he said.
For this and several other achievements, Mr. Merkley was named to the Business Insurance 2015 Risk Management Honor Roll®.
Beginning with no sites at all with highly-protected risk status, Huntsman had 10 as of the end of 2014 and has spent more than $40 million under this improvement program, Mr. Merkley said. Through the third quarter of 2014, it also completed more than 600 risk improvement recommendations, he said.
“When we look at the total economic benefit, in both reduced rates and other savings, we estimate that at the end of last year our total cumulative benefit was over $32 million,” he said.
Catastrophes, though, continue to loom as a major potential threat. “As a chemical manufacturer, we do have a pretty significant presence” on the Gulf Coast, Mr. Merkley said. “North Atlantic hurricanes present a pretty large potential risk to us.”
As part of its program with FM Global, Huntsman has learned that while the manufacturing plants “can withstand some pretty significant wind speeds,” there have been some weak spots in the control buildings.
To address this, “we have been through the process of either strengthening and/or replacing roofs at key critical control buildings within our plants,” Mr. Merkley said.
The company also has “very formalized” shutdown procedures in the event of a hurricane.
“The fortunate thing about hurricanes is you can see them coming,” and once they approach a certain distance from Huntsman plants, the company can begin a process to shut down safely by, for example, filling up tanks, “because a full tank is much more resistant to wind damage than an empty tank,” Mr. Merkley said. “We'll also begin reducing the number of operators or maintenance people at a facility.”
Less predictable are earthquakes. However, “we've identified sites that are in high hazard sites, and at several of our facilities we've put in place automatic gas shutoff valves” that can sense earth movements and will “automatically just shut off the flow of gas to a building or to a production unit, which reduces the risk of a fire following an earthquake by shutting off a key fuel source.”
Working for a company that makes frequent deals means that handling merger and acquisition activity is also a challenge. “We have a close relationship with our corporate development team and our legal group” to help identify potential concerns ahead of time so that it can begin seeing “what integration might look like from a risk management perspective,” he said.
As with many if not all companies, cyber security is also a concern at Huntsman.
“It can be a challenging issue at times to think through what are the potential areas of exposure to third parties,” the impact on reputation, the potential disruption of business, and the potential exposures to Huntsman's manufacturing processes, he said.
Huntsman takes steps to secure its data.
“My team has clear instructions. We really don't keep data on our laptops, and we have all that on a secure, shared drive, in a centralized place.”
Laptops can get lost or stolen or break, he said. “We don't want to lose any crucial data.”
Huntsman Corp.'s risk management philosophy is to retain risk when it makes good economic sense, and to transfer it to insurers when that makes sense, said Brian W. Merkley, global director of corporate risk management for the Salt Lake City-based firm.