Accounting for risk

Wikipedia has a page on Operational risk management, which says this:

The U.S. Department of Defense summarizes the principles of ORM as follows:

• Accept risk when benefits outweigh the cost.
• Accept no unnecessary risk.
• Anticipate and manage risk by planning.
• Make risk decisions at the right level.

I am not an expert on risk, defence, engineering or accounting, but it seems to me that that list is useful in understanding some recent developments on Irish inland waterways.

Managing risk …

The fundamental point, I think, is this: both Waterways Ireland and the insurance companies are seeking to manage the risks to which they are exposed. In the process, they are (in their different ways) seeking to discover, reveal and cost those risks. But the notion that risk costs money is not, I think, universally accepted or universally understood amongst waterways users.

This Wikipedia page on Risk gives one very simple formula for calculating risk:

(probability of the risk occurring) X (expected loss in case of the accident).

So if, for example, I own a dry dock, and there is a one in a thousand chance that a boat in the dock will fall over and crush someone’s leg, and if that person could sue me and get €1 million in damages, then the risk to me is €1,000. I need to provide for that risk in my accounts, either by paying a premium to an insurer, who will take on the risk, or by self-insuring. In reality, of course, I (and the insurance company) will probably have to consider the (smaller) probabilities of several different types of accidents to larger numbers of users over, say, a year, but either way I have to make financial provision for the risks.

Pleasure-boaters on Irish inland waterways have never had to pay the full costs of their activities. When the waterways had commercial traffic, pleasure-boating was an ancillary activity with a relatively low marginal cost. That established a pattern, which continued after commercial traffic ceased, while clever campaigns justified spending on waterways as being important to heritage, tourism or job creation. But the death of the celtic tiger “economy” has resulted in major cuts to waterways budgets for both current and capital expenditure, and WI will control whatever costs it can control. They include insurance: I understand that WI self-insures in the republic of Ireland but pays insurance companies in Northern Ireland.

… and other things too

However, I suspect that WI would be tightening up anyway. Just look at its strategic objectives, from its Corporate Plan 2011–2013 [PDF]:

These Strategic Objectives are to:

1. Manage and maintain a reliable and high quality waterways network.
2. Develop and restore the waterways network.
3. Enhance the existing waterways network to widen its appeal to users.
4. Promote increased use of our waterways resource principally for recreational purposes.
5. Assess, manage and develop the assets of Waterways Ireland.
6. Develop an organisation of excellence.

And see the Organisational Chart later in the same document. Waterways Ireland’s structure, management, objectives and “key actions” show that it is taking control of the waterways to an extent that none of its predecessor bodies managed to do. Those key actions include securing its property, managing risks and implementing systems for (inter alia) environmental compliance and health and safety management.

Dry docks

Now look at those principles of operational risk management from the perspective of Waterways Ireland as an owner of dry docks:

• Accept risk when benefits outweigh the cost.
• Accept no unnecessary risk.
• Anticipate and manage risk by planning.
• Make risk decisions at the right level.

Given the low level of charges, the benefit to WI of admitting a boat to a dry dock is minimal; pretty well any level of risk might outweigh it. Furthermore, any such risk is unnecessary, at least to WI. So, if it does admit boats to its dry docks, it’s going to want to “anticipate and manage risk” as well as possible.

That’s why its new application form for use of dry docks (the one I have is for Tullamore; I presume the forms for other dry docks are much the same) asks for so much information:

• any recorded or suspected underwater damages or defects
• docking plan
• amount of “slop-waste oil” in bilges
• type of keel and whether side shores are required
• transverse spacing of frames
• trim
• material, condition, size and number of ropes
• insurance indemnity
• acceptance of liability for any damage to the dock or gates
• risk assessment for any hot work and, if fuel tanks are to be worked on, a gas-free certificate from an industrial chemist
• method statement for the job to be undertaken
• safety statement for the job to be undertaken.

It also requires safe means of access to the vessel (including ladders and gangways), the use of 110v tools, sound and strong staging and scaffolding, personal protective equipment,  fire watchers and extinguishers, cleaning of the dry dock and disposal of debris and old material. Furthermore, it bans shot-blasting, sand-blasting and spray painting.

These provisions remove both actual costs and risk costs from Waterways Ireland and ensure that the boat-owner shoulders them. Similar, if less detailed, provisions accompany WI’s Mooring Agreement for its long-term serviced moorings and I believe that they will accompany any further consolidation of WI’s control over its facilities and their use.

Insurance

I said earlier that, in attempting to manage risks, WI and the insurance companies …

… are (in their different ways) seeking to discover, reveal and cost those risks.

The information being sought by WI in its dry dock application form will help it to reveal the extent of the risks. In the process, it will force boat-owners to think about, and document, aspects of their own vessels and of their proposed working methods. Both WI and the owners should end up with a more explicit assessment of the risks involved. As WI pushes the burden of risk away, it falls on the owners  — who should be able to seek to insure themselves against those risks.

That, I think fits in with something else that is going on. I think that the insurers are trying to do the same thing as WI is: to manage risks by revealing and costing them — and, in some cases, by refusing to accept them: I have heard that some insurers have now restricted certain aspects of their cover.

If an insurer refuses to cover you for a risk, that may be mildly inconvenient, but you can at least decide that you’re not going to incur that risk, perhaps by cancelling your plan to sail to Australia in your 23′ cruiser. It’s much worse if you find out, after an accident, that your insurer won’t cover you. I fear that the doctrine of uberrima fides may not be sufficiently well understood. Wikipedia says:

[…] all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal.

It quotes Lord Mansfield:

The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist …. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.

That is reflected in the following term, copied from my own policy:

The proposal form […] has been completed to the best of your knowledge and belief and if it contains any material untruth or if any material information is omitted this may affect your insurance cover and we have the option to cancel this insurance from its inception.

Furthermore, the policy requires that the owner exercise due diligence:

You and your manager (if any) must at all times exercise due diligence to keep the vessel in a seaworthy condition. ensure that she is properly fitted with all prudent safety equipment in good working order and to ensure that when left unattended she is properly moored and her accommodation and storage compartments are secured and locked, and to prevent pollution or the risk of pollution following damage to the vessel.

So the owner must reveal everything that might turn out to be important and must manage the vessel to a non-specific (“seaworthy condition”) standard. (The British Boat Safety Scheme might be rather too detailed, but at least it gives you a standard to work to.)

It seems to me that, to cope with both WI and insurance demands, owners will have to:

• document details of their own vessels
• devise and follow standard procedures, including safety procedures, for operations including dry docking and work on boats
• come up with checklists of safety and other equipment
• ask surveyors to conduct more detailed surveys, perhaps using a standard form
• record the results of their own regular checks of their vessels
• arrange professional checks of certain aspects, eg gas.

I think that health and safety initiatives are not so much the result of government interference as a defence mechanism against being sued. I think that boat owners will have to adopt similar mechanisms — and be able to document what they’ve done.