Role of Engineering in Enterprise Risk Management

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By Daniel Z. Barlicos


Engineering is the application of scientific and mathematical principles to practical ends such as design, manufacture, and operation of efficient and economical structures, machines, processes and systems. This is a common definition. To some, engineering is an art more than a science, as it is primarily concerned with how to direct to useful and economical ends the natural phenomena which scientists discover and formulate into acceptable theories. Engineering involves people, money, material, machines and energy.

Several principles of engineering come into play in many areas of the enterprise. For example, the technique used by management to improve working methods and reduce labor costs in all areas where human effort is required is called Methods Engineering. Financial Engineering refers to the application of various mathematical, statistical and computational techniques to solve practical problems in finance. Such problems include valuation of derivatives instruments like options, futures and swaps, the trading of securities, risk management and regulation of financial markets. Even already engineered processes and methods are still being “re-engineered”. Can risks be engineered as well? What is the role of engineering in Enterprise Risk Management – a known financial discipline?

I first saw risk engineers work in the early seventies. Their tasks were to inspect industrial plants and to identify risks that might threaten their continued operations. They used their engineering background to calculate the probability and severity of a loss occurrence. Relating their assessments to the valuation of the assets, the risk engineers do estimations of the maximum probable loss and the normal expectancy loss, with due considerations of the effectiveness of plant protection systems. The risk engineers' role finds usefulness in insurance underwriting. Insurers based their decisions to accept a client's risk based on the recommendations of the risk engineer. Their risk survey reports contain valuable information that describes the potential exposures of an underwriter, such as:

1) General Operations Information
2) Process Flow/Production Diagram, showing bottlenecks and critical points
3) Utilities showing capacities and operating parameters
4) Plant protection systems including safety controls, fire protection, security, preventive maintenance and engineering controls
5) Materials Handling and warehousing showing dangerous and hazardous chemical and substances
6) Packaging and product distribution

The report walks the reader into the plant's risk exposures.

In succeeding years of risk engineering development, assessments of risks have become more sophisticated. Earthquake risk assessments, for example, used detailed calculations of magnitudes using empirical formula and using years of earthquake data recorded around the world. The same was done for weather disturbances such as typhoons, hurricanes and cyclones. A geographical area's exposures to natural calamities have become more predictable from the insurers' viewpoint. They have rationalized their acceptance of risks through risk zones developed out of the risk assessments of natural calamities. The more detailed risk assessments are, the clearer the risks have become. The ultimate result is a more rationalized premium structure for clients.

Insurance is not the sole beneficiary of the risk engineering practice. Across the enterprise where risks manifest, risk engineering applications are widely used.

  1. Safety, Health and Environment
Under the stewardship of a safety engineer, the safety, health and environmental management department of a company is tasked to create a safe working environment for its people. This task includes technical components to support the program to help control and manage harmful incidents. These include:
a) Designing safe structures such as ladders, walkways, machine guards and the like to prevent accidents;
b) Conducting hazard operability studies (HAZOP), Process Hazard Analysis (PHA) and other risk assessment techniques before starting up operations. These studies usually need engineers to certify results. These studies would also indicate specific engineering controls to help ensure safe operations for the plant.
c) Testing and isolating polluting materials and emissions to protect the environment and comply with certain regulatory requirements on environment protection.
d) Analyzing statistics to determine incidence ratios and to establish patterns and circumstances for better understanding safety behaviors and conditions in the operations. Oftentimes, results of statistical analysis are tempered by some engineering considerations and controls that are in place.


Published in the Philippine Star, May 05, 2009








(Daniel Z. Barlicos is a Senior Manager for Risk Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. The views and opinions expressed herein are those of Daniel Z. Barlicos and do not necessarily represent the views and opinions of KPMG in the Philippines . For comments or inquiries, please email manila@kpmg.com.ph or dbarlicos@kpmg.com ).