The speaker for Breakfast Presentations hosted by IRMSA in September, was Gordon Howes, winner of the IRMSA Risk Manager of the Year Award. Gordon is currently the Practice Leader of Marsh Global Analytics Africa – a division that specializes in the construction of risk models in the insurance, enterprise and project fields. He is a Monte Carlo Simulation expert, with a strong background in Engineering and Project Management. Gordon has constructed numerous risk models in the Mining, Oil, Gas, Energy and infrastructure sectors.
The IRMSA breakfast series were attended by over 300 Risk professionals in Gauteng, KwaZulu Natal and the Western Cape.
In his presentation, Gordon focused on ‘simulation modelling’ and how it can be used as a backbone of risk calculation. Howes started his presentation by summarising the different Risk Management approaches and their benefit in terms of qualitative or quantitative analysis of risk in organisations. "ERM promotes qualitative analysis of risk and the process is effective in that it looks at causes, consequences and mitigations – it is an approach that will always be there in Risk Management. Application of simulation modelling, on the other hand, takes more of a quantitative approach where various scenarios can be tested in order to give a more a realistic view of what is likely to unfold in a project,” says Howes.
Using some of the well-known past and present projects Howes painted a picture of the endless complexities that may occur in a project. These complexities can range from labour, incompetence by Project Managers and engineers, disasters to unexpected developments that delay the process resulting in escalated costs project.
Howes mentioned the Sydney Opera House project which is said to have been over 4000% above budget and he raised concern about possible delays around the Medupe plant which has had its own challenges thus far. "The point of simulation modelling is to ensure that risk contingency needs to be calculated and included as part of the approved budget especially if it cannot be covered by insurance,” explains Howes.
"Simulation modelling encourages project teams to test a variety of scenarios without incurring additional unexpected costs. The challenge with some major projects are that there isn’t a comprehensive and rigorous scenario testing at the early stages of the projects,” he added. Howes explained that the benefits of simulation modelling far outweigh the disadvantages. The main disadvantage is that the process is but only a reasonable predictor of outcome and that whilst it is highly effective, the results cannot be 100% guaranteed as it is about possible scenarios.
However, the benefits are that the model will be a replica that simulates reality and as such it is the most reliable predictor of possible outcome. The process can accommodate input variations and also outline the consequences of time delays.
"It is important to note that in major projects there are always the ‘Uninsurable risks’, ‘insured risks’ and uninsured risk. Uninsurable risks include wars or major large scale environmental disasters. Insurable risks are those that can be transferred to insurers and uninsured risks include unplanned project delays as a result of labour uncertainties or incompetence on the part of any role player in the project,” explains Howes. "Through simulation modelling there is a closer focus on uninsured risks, where they are quantified, analysed and allocated a value,”.
Because simulation modeling is about constructing a model that replicates a project, it is possible to apply this process as a tool for any operation. "The key is to ensure that the critical elements are included in the simulated model from the inputs to the specific dynamics that occur in a business environment,” Howes continues.
Lastly, for Risk Managers the process also helps to simulate the optimal total cost of risk (TCOR) where various risk mitigations are included in the model and the business can analyse the effectiveness of specific risk management interventions. "It is clear from this that simulation modelling can help management to use TCOR as a yardstick to measure cost of pure risk against mitigations such as insurance whilst ensuring that the residual risk left yields sufficient benefits that justify engaging in a project,”.