Triple Bottom Line Risk Management_9 ppt

The outcome of this approach was indeed conservative, but the advantage was that the regulators accepted the method and the results it produced with minimal debate. Modeling Results ISR Insurance Component. The results of modeling for the ISR insurance com- ponent produced a sum equivalent to the annual insurance premiums that would be paid to realistically cover the occurrence of sudden events. Figure 15.2 shows that two risk issues (pit lake outlet and waste seepage release) were the two riskiest events and accounted for approximately 96 percent of the total project risk for the ISR insurance events. The combined occurrence cost of these events was therefore the risk cost. However, as insurance for sudden and accidental environmental events was widely available, the risk cost was not used directly in the derivation of the capitalization sum. Instead, discussions with WGC’s broker identified an annual premium offered by the insurance industry, and this was used to calculate the ISR insurance component. Even though the risk quotient for the catastrophic tailings release event lay below the risk cut-off, as Figure 15.2 shows this event dominated the exposure profile. From a technical standpoint, this event could be excluded, but it was re- tained for political reasons. The outcome of the discussions with the insurance in- dustry was that ISR insurance to cover $12 million for catastrophic tailings release was around $45,000 per year (but for the same premium up to $50 million could be purchased). This level of cover would be more than adequate for the riskiest events. The estimated net present value of an annual ISR premium of $45,000 per year, discounted over the 50 years that the potential for a tailings release event was assumed to exist, was $960,000. Gradual Risk Component. Figure 15.3 shows the key information used to derive the gradual risk component of the capitalization sum. Figure 15.3 shows that the riskiest issues (waste collection pond quality and waste rock bypass) contribute to almost 94 percent of the total project risk for all the issues. The calculated risk cost for the events shows a moderate degree of uncertainty where the estimate varies from $2.997 million (optimistic, CL 50% ) to $5.281 mil- lion (pessimistic, CL 95% ). The planning (CL 80% ) estimate of the risk cost is $3.977 million. The exposure profile chart of Figure 15.3 shows that the calculated risk cost would also be able to cover the occurrence of all individual issues lower down the risk profile. On the basis of the modeling results, the gradual risk component of the capi- talization sum was set at $3.977 million. Public Liability Insurance Component. The public liability insurance compo- nent of the capitalization sum was equivalent to the annual insurance premiums 240 / Indemnity in Perpetuity: Mining, New Zealand 3672 P-15 5/3/01 2:56 PM Page 240 All Costs Expressed as $ x 1,000 POST CLOSURE - RANKED RISK EVENTS ISSUE Liability / Insurance PROJECT RISK ANNUAL RISK Cost CL 50% Cost CL 80% Cost CL 95% PROJECT Frequency % Cumulative Risk Pit Lake Outlet ISR risk 12.89703979 0.128970398 140.92 248.51 463.64 0.1 90.39% Riskiest Waste Seepage Release ISR risk 0.77938824 0.008118628 202.97 217.54 233.69 0.00384 95.85% Events Waste Catastrophic Fail ISR risk 0.592451958 0.011849039 11,884.47 12,386.75 12,869.02 0.00005 100.00% Current ISR Cover 50,000 Current Premium 45 Postclosure ISR Insurance Events Exposure Profile 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Pit Lake Outlet Waste Seepage Release Waste Catastrophic Fail Exposure ($ × 1,000) Cost CL 50% Cost CL 80% Cost CL 95% Figure 15.2 Occurrence cost of insurable (ISR) postclosure events if the risk events occur. 241 3672 P-15 5/3/01 2:56 PM Page 241 All Costs Expressed as $ × 1,000 POST CLOSURE - RANKED RISK ISSUES ISSUE Liability/Insurance PROJECT RISK ANNUAL RISK Cost CL 50% Cost CL 80% Cost CL 95% PROJECT Frequency % Cumulative Risk Waste Coll Pond Quality Gradual risk 20.84170361 0.217101079 2150.081627 3070.336856 4351.640244 0.0096 68.17% Riskiest Waste W/rock Bypass Gradual risk 7.845559687 0.078455597 770.0979491 1078.869357 1526.658937 0.01 93.83% Events Waste Tailings Bypass Gradual risk 0.784555969 0.00784556 784.0646308 1092.551973 1541.663213 0.001 96.39% Pit Lake Quality Gradual risk 0.620984847 0.006468592 648.9016475 852.4990239 1097.384336 0.00096 98.42% Waste Pond Quality Gradual risk 0.3 0.003 29.79944131 42.98176627 59.73693642 0.01 99.40% Pit Wall Pumphouse Gradual risk 0.15509704 0.00155097 1528.396594 2165.304602 2983.203382 0.0001 99.91% Waste Perimeter ARD Gradual risk 0.026985199 0.000269852 55.52840839 85.87479011 130.3709727 0.0005 100.00% GRADUAL ($x1,000) GRADUAL ($×1,000) COMPONENT Optimistic Planning Pessimistic COMPONENT Amount Req'd Sum 2,997 3,977 5,281 Sum 3,977 Risk 0.321 0.418 0.551 Postclosure Gradual Events Exposure Profile 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 Waste Coll Pond Quality Waste W/rock Bypass Waste Tailings Bypass Pit Lake Quality Waste Pond Quality Pit Wall Pumphouse Waste Perimeter ARD Exposure ($×1,000) Cost CL 50% Cost CL 80% Cost CL 95% Figure 15.3 Occurrence cost of uninsurable, gradual postclosure events if the risk events occur. 242 3672 P-15 5/3/01 2:56 PM Page 242 that would be paid to realistically cover third-party claims. No specific issues were identified that would require public liability insurance. However, it was rec- ognized that the trust would be managing land and would encourage public access. It was therefore assumed that the trust would require a standard public liability cover and that the capitalization sum would need to provide for that insurance. Third-party, or public liability, insurance to cover property damage and injury was widely available at the time. Annual premiums of around $5,000 were typi- cally required for policies with $5 million of cover. The net present value amount required to provide these premiums in perpetuity was estimated to be $127,000. Postclosure Base Costs. The estimated annual base costs to cover land manage- ment, monitoring, and remedial action averaged around $20,000. The net present value of this annual expenditure in perpetuity totaled $549,000. Summary Table 15.3 shows a consolidated summary of the capitalization sum to be vested with the trust at the time of its establishment at closure. The total sum of $5.613 million would allow the trust to undertake its land management and maintenance responsibilities in perpetuity. Implementation and Risk Reduction / 243 Table 15.3 Capitalization Sum Components ($ × 1,000) Component Amount Req’d 2017 Cover ISR Insurance (premiums) 960 50,000 Gradual Risk Issue Costs 3,977 na Public Liability Insurance (premiums) 127 5,000 Postclosure Base Costs 549 na TOTAL 5,613 na I MPLEMENTATION AND R ISK R EDUCTION When the bond proposal was put to the regulators, the bond strategy and quantum were accepted without challenge. The capitalization bond became one of the mat- ters appealed to the Environment Court by objectors to the extended project, and so the strategy and quantum subsequently underwent legal and technical exami- nation within the court situation. At the hearing, the regulators supported adoption of WGC’s proposal without change. Opponents to the project offered no contrary technical or other evidence that justified making significant modifications to WGC’s proposal. In his decision, the judge chose to round the quantum up to $6 million, and WGC posted a capitalization bond of this amount. 3672 P-15 5/3/01 2:56 PM Page 243 The extended project consent conditions allowed for the bond (and capitaliza- tion sum) to be reviewed annually. These reviews will account for any changes to the operation that might influence the risk assessment inputs and outputs, infla- tion, plus any other issues that could affect the bond amount. The review process provides WGC with the opportunity to look at and reduce its postclosure risk pro- file. It is hoped that, over time, this focus will enable the very reasonable capital- ization sum to be further reduced. S UMMARY The WGC had a regulatory obligation to estimate and provide a postclosure as- surance to indemnify the people of New Zealand against the cost of mitigating po- tential environment impairment arising from its rehabilitated mine site at any time in the future. Application of the RISQUE method has led to development of a postclosure as- surance strategy and determination of an adequate and realistic value to the satis- faction of the regulators. An agreed definition of “perpetuity” was crucial to development of the suc- cessful assurance strategy. Using the concept of the time value of money, the risk analyst demonstrated that perpetuity could be defined in financial terms, a solution immediately accepted by WGC and the regulators. 244 / Indemnity in Perpetuity: Mining, New Zealand 3672 P-15 5/3/01 2:56 PM Page 244 16 C ORPORATE R EPORTING AND I NSURANCE : R ESOURCE P ROCESSING , U NITED S TATES This case study examines: • Application of the RISQUE method to achieve compliance with corporate re- porting regulations and guidelines • Balance sheet recovery of contingent liability • Using sound risk management processes to improve the bottom line • Development of insurance strategies B ACKGROUND U.S. Corporate Reporting: Staff Accounting Bulletin 92 Regulatory pressure is increasing for public corporations to disclose potential con- tingent liabilities through the corporate reporting process. Contingent liabilities are losses that can be anticipated to arise if particular events occur. The aim of corporate reporting of contingent liability is to protect the interests of current and potential shareholders by informing them of potential liabilities that could have a material effect on corporate assets and operations and to maintain fairness in the marketplace. In addition to disclosure of the dollar value of contin- gent liability, the regulators require discussion of uncertainties affecting estimates and how management has handled, and proposes to handle, these liabilities and uncertainties. Reporting Requirements. Legislation has been in place since June 1993, with re- lease of the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin 92 (SAB 92), which requires disclosure of environmental and product 245 3672 P-16 5/3/01 3:00 PM Page 245 liabilities. In 1994 the SEC signaled its intention to enforce SAB 92 and to target several types of corporation thought to have significant environmental liabilities. The organizations targeted were operating in oil and gas, pulp and paper, chemi- cals, and property and casualty insurance companies. SAB 92 is the SEC interpretation of existing securities and accounting regula- tions and is a “full-disclosure” concept. SAB 92 requires a financial report con- taining comprehensive disclosure of: • Actual assets and liabilities • Potential liabilities: present and future • Potential recoveries: present and future • Secondary and derivative liabilities and assets • Footnotes that present detail on methods used to derive the sums disclosed • Narrative discussion, in Management’s Discussion and Analysis (MD&A), of the uncertainties associated with events and potential and proposed solutions SAB 92 has several specific requirements in relation to the disclosure of contingent environmental and product liabilities. It requires separate disclosure of a potential liability and a related potential recovery. It is not acceptable simply to disclose the net liability. SAB 92 requires discussion of uncertainty, specifi- cally, the uncertainties affecting the precision of the estimates and the uncer- tainty associated with a corporation’s legal responsibilities regarding the liabilities. Finally, SAB 92 requires substantial discussion both of the balance sheet impacts of potential environmental events and of management of the po- tential liabilities. SAB 92 requires that corporations that are publicly traded in the United States must disclose environmental liabilities that are “reasonably possible to occur.” They also must include in the financial statements those liabilities that are “rea- sonably probable” to occur and have a “material” effect on the assets and profits of the corporation in question. Impacts of Changes. All corporations that are publicly traded in the United States are affected by SAB 92. The ruling not only includes U.S based companies reg- istered on U.S. exchanges but also non-U.S. corporations trading registered issues on U.S. exchanges, and non-U.S. corporations trading American Depository Re- ceipts (ADRs) in the United States. SAB 92 therefore has far-reaching impacts on many corporations beyond the boundaries of the United States. The impacts of SAB 92 are also likely to extend, indirectly, to corporations around the world, because regulators in a growing number of countries are show- ing an increasing interest in introducing similar corporate reporting regulations. In addition, in some countries corporate professional organizations are proactively introducing voluntary corporate reporting procedures. Prior to SAB 92, it was acceptable for corporations to disclose only those lia- bilities that they knew about and that were current. A typical statement would have 246 / Corporate Reporting and Insurance: Resource Processing, United States 3672 P-16 5/3/01 3:00 PM Page 246 been: “We know of no contingent liabilities that are material.” An important im- pact of SAB 92 is a shift in the burden of discovery. Now corporations can claim “no material effect” only if they can state: “We have identified and measured all of our contingent liabilities that are reasonably likely to occur, and have deter- mined that none are material, outside of those disclosed here.” As a consequence of SAB 92, corporations must take positive action to evalu- ate their operations (e.g., through environmental audits), quantify the liabilities (and their uncertainties), and then make a determination as to materiality. Table 16.1 summarizes the impact of the introduction and enforcement of SAB 92 on the characteristics of corporate reporting. The potential consequences of noncompliance with SAB 92 are: • Increased scrutiny and investigation • Notices of noncompliance and violation • Fines for violations of reporting regulations • Suspension of trading • Market effects from news of SEC scrutiny or enforcement actions The following case study was originally based on a confidential assessment of third-party exposure to environmental impairment. The events and liabilities pre- sented here are not the actual results of the assessment; the results have been mod- ified to reflect the risk profiles of typical, large industrial corporations. The name of the corporation is confidential; therefore, the generic “The Company” is used herein to refer to the corporation. Case Study Introduction The Company had substantial financial interests in approximately 10 operating companies at over 30 sites located around the world, in the United States, Background / 247 Table 16.1 Impact of SAB 92 Prior to SAB 92 Post-SAB 92 Highly variable reporting practices Relatively uniform reporting practices Disclosure of few, if any, contingent liabilities All material liabilities are reported Tendency to report minimum values Reporting of minimum values is generally not allowed Reporting of net value (liability minus recovery) Net value reporting is not allowed No explicit treatment of uncertainty Explicit treatment of uncertainty is required Little or no MD&A Extensive footnotes and MD&A are required in the financial statements Disclosure had little or no effect on the balance Disclosure can potentially have a major effect sheet on the balance sheet 3672 P-16 5/3/01 3:00 PM Page 247 Australia, Indonesia, Taiwan, and New Zealand. The Company was engaged in mining, mineral processing, and manufacturing. The Company’s corporate risk manager needed to gain a quick, comprehensive understanding of The Company’s environmental and third-party liability with re- spect to substantial sudden and gradual environmental events. This information was required to restructure the corporate environmental and third-party liability insurance strategy. Prior to this assessment, the corporate risk manager had no way of assessing whether the current insurance cover was adequate. The Company was also required (under SAB 92) to report corporate environ- mental and contingent liability on the balance sheet. The Company had been a leader in applying new technology to enable it to better manage the environment and its business. R ISK I DENTIFICATION Panel Process The Company selected an expert panel to identify the key environmental events at each site that could lead to substantial environmental remediation and/or third- party claims. The panel members worked together for one week at the com- mencement of the project. During that time they reviewed the available information, became aware of the project aims, understood the project methodol- ogy, and established the appropriate roles and responsibilities of panel members. After the first week the panel members worked individually on preparation of in- formation in a predetermined format. The role of the risk analyst was to coordinate panel contributions, ensure consistency of approach, and perform subsequent risk analysis. The expert panel consisted of the business manager, a mining industry envi- ronmental specialist, a manufacturing industry environmental specialist, and cor- porate legal counsel. Where additional information was needed for specific events, individual panel members consulted with Company operations personnel. The panel members were generally familiar with many of The Company sites. In cases where the panel members had little or no firsthand knowledge of particular sites, the panel experts compared what they knew of The Company site activities and conditions with their experience of similar activities carried out in similar envi- ronments elsewhere in the world. The available information on site conditions varied in quality and comprehen- siveness from site to site. Information for some sites consisted of detailed envi- ronmental audit reports and backup data. For other sites, a selection of technical reports, such as engineering reports, groundwater studies, and environmental in- cident reports, were available. In a few cases, the only information available was a brief project summary and background photographs drawn from published an- nual reports. 248 / Corporate Reporting and Insurance: Resource Processing, United States 3672 P-16 5/3/01 3:00 PM Page 248 Nature of Risk Events The panel identified 235 key events that were entered into the risk register. Each event was classified as either a sudden or gradual occurrence to assist with the later determination of an insurance strategy. Sudden risk events were considered by panel members to be accidents, generally involving low probability and high consequences (i.e., tanker collision, fire, or explosion). Gradual risk events are representative of the more classic cases of pollution and usually had relatively high likelihoods of occurring. Typical gradual risk events were leakage from an underground storage tank and seepage of leachate from a hazardous waste dump to the groundwater. The panel members estimated the annual frequency of each event, median and high estimates of occurrence cost, and estimates of the most cost- effective management steps that could be taken to prevent the event from further occurring. Panel Conclusions The risk events identified by the expert panel included issues such as: • Stormwater discharges to surface water • Wastewater discharges to surface water and sewer • Soil and groundwater contamination from aboveground and underground storage tanks (ASTs and USTs); landfill leachates; stockpiles; tailings seep- age; drum disposal; waste disposal; PCB releases; chemical, oil, and solvent spills • Pollution from air emissions of heavy metals, particulates, oxides of nitrogen and sulfur, methane, carbon dioxide • Transport and off-site disposal of wastes • Noise • Fuel and chemical transport accidents • Asbestos handling • Degradation of sites of cultural or heritage significance • Chlorine and fluoride emissions • Refinery waste storage • Cooling water discharges • Mine water discharges • Tailings dam failure • Acid rock drainage (ARD) • Concentrate spillage during transport Risk Identification / 249 3672 P-16 5/3/01 3:00 PM Page 249 [...]... Cumulative Risk 100% 450,000 Cumulative Cost ($ × 1,000) 500,000 Figure 16.2 Sudden event cumulative graph showing the progressive contribution of risk events to total risk and occurrence cost with events ranked in order of decreasing risk quotient per year risk threshold The six most risky insurable gradual events have risk quotients above $600,000 per year In addition, the top 20 risk events have risk. .. the risk quotient and exposure profile of all sudden risk events ranked from highest to lowest risk The profile shows that a relatively small number of risk events have risk quotients that are effectively identifiable on the profile A total of 20 events have risk quotients above the risk cut-off criteria set by the panel ($20,000 per year); the other 46 events have comparatively minor to negligible risk. .. ranked from highest to lowest risk The risk quotient profile shows that the risk posed by the insurable gradual events is substantially greater than that posed by the sudden events The profile shows that 50 risk events, approximately two-thirds of identified insurable, gradual risk events, have risk quotients that are greater than the $20,000 3672 P-16 5/3/01 3:00 PM Page 253 Risk Analysis / 253 Cum Pessimistic... and the cumulative percent risk for risk- ranked events This figure shows that the most risky 12 events are responsible for approximately 93 percent of the total risk presented by all sudden risk events Insurable Gradual Events Panel members identified a total of 73 insurable gradual events Figure 16.3 shows the risk quotient and exposure profile of all insurable gradual risk events with the events... contaminated sediments Risk Management Criteria During the project, the panel members defined several criteria that assisted with interpretation of the modeling results and provided guidance in developing risk management strategies The criteria were: • A risk quotient of $20,000 per year was used as the cut-off threshold between the riskiest events and those that posed a low risk • Risk event occurrence... one-third of insurable gradual risk events (22 events) show negligible risk quotients of less than $20,000 per year The exposure profile of Figure 16.3 shows that risk events within the group of the most risky 18 or 20 events generally present more exposure than events within the next 20 or so most risky events At the planning confidence level, approximately 10 of the most risky 20 events present approximately... Fire 0 Risk Quotient ($1,000 per year) 90,000 Cost ($ × 1,000) 3672 P-16 Figure 16.5 Occurrence costs of gradual, uninsurable events shown at three selected confidence levels with events ranked in order of decreasing risk quotient STRATEGY DEVELOPMENT Where possible and cost effective, risk treatment can be achieved by transferring risk through insurance Where risk transfer is not an option, risk reduction... were therefore assumed not to be insurable due to their high likelihood of occurrence 3672 P-16 5/3/01 3:00 PM Page 251 Risk Analysis / 251 RISK ANALYSIS Risk Modeling The main features of the risk model that were specific to this project were: • The costs of consequences of each risk event were divided into two categories, third party and environmental impairment • Third-party consequences included... risk quotients Of the 20 riskiest events, 10 have risk quotients above $200,000 per year The exposure profile of Figure 16.1 shows the 10 or 12 highest -risk events present, on average, approximately $2 million of exposure at the planning confidence level This compares with an exposure of approximately $3 million for the next 20 risk events with material exposure For the 12 highest risk events, the representative... compared with $7 million for the next 20 most risky events 5/3/01 3:00 PM Page 252 252 / Corporate Reporting and Insurance: Resource Processing, United States Risk Quotient (Pessimistic) Optimistic Occurrence Cost (CL 50%) Risk Quotient (Planning) Event Risk Quotient 15,000 3,000 14,000 13,000 11,000 10,000 2,000 9,000 8,000 1,500 7,000 6,000 5,000 1,000 4,000 3,000 Risk Quotient ($1,000 per year) 2,500 12,000 . 42 .98 176627 59. 73 693 642 0.01 99 .40% Pit Wall Pumphouse Gradual risk 0.155 097 04 0.00155 097 1528. 396 594 2165.304602 298 3.203382 0.0001 99 .91 % Waste Perimeter ARD Gradual risk 0.02 698 5 199 0.0002 698 52. 1 092 .55 197 3 1541.663213 0.001 96 . 39% Pit Lake Quality Gradual risk 0.62 098 4847 0.006468 592 648 .90 16475 852. 499 02 39 1 097 .384336 0.00 096 98 .42% Waste Pond Quality Gradual risk 0.3 0.003 29. 799 44131. 463.64 0.1 90 . 39% Riskiest Waste Seepage Release ISR risk 0.7 793 8824 0.008118628 202 .97 217.54 233. 69 0.00384 95 .85% Events Waste Catastrophic Fail ISR risk 0. 592 45 195 8 0.0118 490 39 11,884.47