INTRODUCTION
Many international conferences have been held to discuss and debate the problem of handling maritime risks that is, risks at sea which affect the movement through mighty oceans and seas of massive tankers, cargo shipsand many water borne vessels thathave a prerogative in movement of merchandise and cargo of all description internationally. However, very few have been devoted to study the implications ofmaritime risks on a broad canvas and how they affect international ocean trade.
Almost 40% 0f the commodities which are moved over the world are through sea route.The main reason why this had not been done could be that with so many agencies in the field each charged with responsibility of attending to many tasks which have to do with ship and cargo, the authorities did not consider it expedient that there was a need for a single agency to focus on management of maritime risks as an exclusive task.
The term “risk management” is widely used today, but there is not as yet a general agreement about the purpose and application in real life situations. Some writers limit the application of risk management to just insurable risks whilst others see management of risk asbroad based covering all aspects of uncertainty in all operations: fire, accident, travel, navigation, mountaineering, sports and games, engineering, construction, consequential loss and many others.
Even to define “risk” in an intellectual, adequate and universally acceptable form is a somewhat difficult proposition and the definition we have used is not mostly comfortable. The potential variability in the outcome in future of a stated situation due to “uncertainty” is what we generally see and reflect upon how to advance further. In such a situation, we associate“risk”with“future uncertainty” or “the possibility of non-achievement of an expected result”.
In doing this we are concerned with the character of the risk, howcan it happen, its severity, andwhateffect it would or might have and its probability in terms of how likely is its occurrence and how spread the damage could be. In risk management apart from comprehending the morphology of risk, we are seriously concerned with what can be done economicallyabout each significant risk or threat so as to mitigate the effect of risks.
We can therefore define risk management as “identification, measurement and economic control of risks that threaten the assets and earnings of a business or enterprise, or the continued production and supply of essential goods or services”.Alternatively, we could define risk management as the “recognition, evaluation and management of future threats or impendence so as to minimize their economic or utilization or other impact”.
Considering who manages the risk, considerable ideological confusion has been created by the wide spread use of the term “risk manager”, especially when it is used as an alternative to “insurance manager”. The insurance buyer is not a risk manager; he can only help others to manage risk, provided he/she comprehends the constituents of a risk situation.
The risk manager for sure is the line manager, whether the managing director of the company or the manager of a factory, the captain of a ship, or aircraft or a manager with executive authority. His activities, especially in anticipation, competence, and reaction to events, determine the effectiveness, as the case may be, of his enterprise, company, government, or indeed, his potential risk management techniques.
In the context of Marine Insurance, risk can be broadly classified under three categories. The first is the “risk that can be directly managed or controlled by the ship owner or the captain of the ship because it arises from their own managerial activities”. The second relates to“risks that arise from the environment in which the ship owner or captain operates, namely technological, social, political and physical”. The third category covers the area of” insurable risk, including property damage, death and physical injury, liability and business interruption caused by maritime or other perils”.
Risk management is essentially not something new. It has been there right from our birth. Everyone involved in any activity, more so in marine activities, has of necessity to manage risk, and indeed this has always been the case. But what is new about risk management is the greater and more coordinated attention paid to future uncertainties that may threaten the enterprise.
Thanks to modern day technology, computer programming can throw light on all the possibilities of a particular action which can help us to identify where risks exist, how and when they arise and how to tackle them. Looked at in this way the work of risk management is for a specialist both inside and outside the organization and must be confined to advice in analysis, measurement and preparation of detailed plans of action to control and finance the risk.
The most obvious feature of marine risk management today is that it is not well coordinated. Many different bodies are engaged in research and practical work on different aspects of risk and there is a great need for synchronization and bringing together a number of those different views in the expectation that a more effective overall risk management effort would be the outcome.
COMMERCIAL RISK’s -SHIPOWNER’S VIEW
The word risk is of Italian origin. It involves facts as well as compassion and it has a positive as well as a negative connotation. Because of our affiliation with the insurance industry, the term risk for most of us stands for something negative – the possibility that something unfortunate or unpropitious might occur in the future. Outside the insurance area, risk is a more two-sided concept and not a thing to be avoided as such.
It is customary to talk about two types of risk – insurable risks – with which we are very familiar – and commercial risks.The latter type is related to the uncertain, future, commercial environment one is engaged in – i.e. development of supply and demand, the turn of the business cycles, the technological and political development etc. Against these risks we normally cannot take insurance coverage because they are speculative in nature or if we are compelled to do so the cost is excessive.
Most business actions imply that one commits resources (spends money) now with the expectation that he/she in future will receive a reward (profits), which hopefully is larger than the resources committed. The point is that the outlay comes first in time and is certain, whereas the revenue comes afterwards and is more or less uncertain. It follows that due to the inherent nature of business, it is futile to try to eliminate risk.Even if we managed to eliminate it, there would be no uncertainty left and hence no future and no business. But let’s not get worried,we shall never manage to eliminate risk completely, so there will still be room for business.
But if there is no point in striving to eliminate risk, what is then to be done? What is the way out? We can try and select the “right” risks and, furthermore, we must try to manage properly the risks we have decided to take on.Taking the right risk must imply that we concentrate on those areas where our skills and resources provide the best profit potential. The question is: What services are we in a position to provide better and more efficiently than others.
Another important aspect of this is the risk attitude of the organization. Is it a “risk lover” or a “risk hater”?High risks are normally associated with possible large rewards whereas smaller risks go with more modest returns. The trade-off involved in this choice is a very subjective matter and in this context it is clearly without meaning to talk about ‘right’ or ‘wrong’ risks. A risk is a risk “right or “wrong” that may not be apparent when the choice is made. Only when we see the final outcome, we become aware of the consequences and we become wise to the fact whether we chose the right or wrong risk. The important thing, however, is to be conscious about one’s risk attitude and act accordingly.
When we proceed to the area of risk management, the first step is, obviously to identify the risks threatening the assets and earnings. The next must be to try and understand the risk and, if possible measure it. Finally, it is necessary to control the risk. Financial control of risks can take many forms – insurance cover might be one, having various contingency plan might be another or finally quit the enterprise we entered.. After these more general view points on the concept of risk, let us through a case study proceed to try and examine how to manage commercial risks.
The Williamson Shipping Group of Companies
The Williamson Shipping Group of Companies was established more than a hundred years ago in one of the Scandinavian countries and was one of the largest shipping companies operating seventy cargo vessels totaling about 2.7 million DWT. They had an administrative block consisting of 16 units at a cost price of approximately $450 million. The liner sector was the backbone of the company, but the tanker and bulk fleet was also quite substantial. Over the last few years, they had developed a sector for off shore services consisting of drilling rigs, constructing support vessels and supply boats.
One point with particular relevance to the problem of risk management was the fact the ownership of the group of shipping companies was predominantly privately held and a major shareholding was controlled by three partners of the firm. A company’s risk attitude should ideally be formulated by those bearing the risks. A major group in this respect was definitely the owners. By having the owners ‘in the house’, they had a unique opportunity to develop a coherent, overall risk policy and had it tested and continuously updated against actual events.
Their commercial risk management philosophy was built on:
- Diversification of interest, and
- Corporate cash flow planning and control.
With each business sector they tried to maintain a diversified employment position. In the tanker and bulk sector, there was a mix of long and short term charters and spot trading. In the liner field they were involved in services more or less all over the world. Due to the business cycles being out of phase with each other around the globe, the various liner services seldom peaked or bottomed out at the same time. That gave a stabilizing effect to the overall contribution from the liner sector.
In the operation of cargo vessels by the shipping group the major issue was the question of trade-off that involved high risk/high return and low risk/low return and that question also often tied with different time horizons. Business where the lead time for establishment was long tended to give them a decent, relatively stable return over time – e.g. liner services.In other sectors their investment was more limited – the asset itself.
It was then easier for them to get in and get out of the business, as the results were exposed to large fluctuations. The same argument could be made or long term and short term employment contracts. The point at issue here is by conscious choice of business sectors within one’s field of expertise, one could obtain strategic diversification of risk on the investment level. By also having a diversification of interest within each sector, one is not fully exposed as the markets fluctuate with business cycle.
An important element in the cash flow system were, obviously the operating budgets and they had both annual detailed budget and a less specified five year budget. The budgeting cycle was coordinated by the Finance Division, but the actual planning and budgeting was done bythe cost and profit responsible departments. The budgets were presented to the Board, where they were exposed to critical review and eventually approved after possible revisions. Without over-emphasizing that, they wanted the operating budgets to be target-oriented and thereby serving as an inspiration and performance yardstick for the business managers.
Taking the target orientation of the operating budgets into consideration, it would not have been prudent for the Board to incorporate the budgeted operational results directly into the flow budget. On the average they were prepared that more results would eventually turn out below budgeted figures than above. In the event there was a need to reduce some of the approved operational budgets inorder to arrive at the expected overall contribution from operations in the cash flow budget.
BY A.Ramachandran