Long-term governance failures caused Beirut blast

As the international community continues to assess the fallout from last week’s explosion in Beirut, leading risk professionals believe a long-term failure in national governance and governmental structures were likely behind the deadly event.

This week the Lebanese government resigned after the huge explosion at the capital’s port on August 4. Ministers were widely blamed for failing to safeguard the port, which was destroyed after a significant blast involving 2,500 tonnes of the chemical ammonium nitrate.

The death toll from the explosion has surpassed 200 people according to official sources as of August 11, with casualties topping 6,000. The Lebanese people have accused their government of widespread corruption and years of negligence.

Insurance analysts at AM Best believe the incident will put strain on Lebanon’s insurance sector. Insurance penetration rates are low in the country, but property insurance has been growing in recent years. The damage affected residential areas in one of the wealthiest parts of the country.

Some of the risk profession’s top executives believe the tragic incident underlines a national failure of governance.

John Ludlow, the chief executive of Airmic, the UK-based association for corporate insurance buyers and risk management professionals, says: “The root cause of the Beirut disaster is a long-term decline in national governance and the dysfunctional national structures ultimately caused by sectarian political leadership in Lebanon”.

“This is a tragedy on so many levels: the lives lost, the pain and suffering of the survivors, the property damage, the capability of the country to trade and the inability of people of different beliefs, however well educated, to work together for a better future. All this whilst the world looks on, sometimes trying to help, sometimes using the situation for their own ends. “

He added “the only glimmer of hope” was “the remarkable resilience of the people themselves”, the prospect that “one day a leader will come to help them heal their divisions, regain national sovereignty and rebuild the state infrastructure before disaster befalls them again”.

The tragic events have drawn comparisons with the explosions in the Chinese port city of Tianjin five years ago, which killed 114 people and injured more than 700 others.

The Tianjin explosion originated in a warehouse containing dangerous sodium cyanide, and was said to have generated power equivalent to 3 and 21 tonnes of TNT. The event resulted in insured losses of more than $3 billion, with most claims from motor, cargo, liability, and property insurance.

Ludlow said the comparison between the two events was “superficial”, and laid the blame at the government’s door: “All the key people knew what should be done; it was their willingness or inability to act that was the issue, and this stems from the governance issues.”

Franck Baron, group deputy director for Risk Management & Insurance at International SOS and Chairman of PARIMA, called on the risk community to learn from the event.

“Let’s not take this for granted,” he said. “Do we have full visibility and understanding of our operations and supply chain, including suppliers and external vendors and contractors? Are local regulations and international standards properly respected and enforced? The Beirut explosion shows clearly that the storage was not designed for such dangerous chemicals and has been there for six years.”

Ludlow said risk profiling would be “key” for similar sites around the world. “One cannot isolate the asset from the context,” he said. “If one has assets in parts of the world that have raised risk profiles, dysfunctional state governance in this case, then more effort needs to be put into understanding the situation and mitigating the risk in line with one’s risk appetite.”

”Risk managers and audit managers must also be very aware of the difference between gross and net risk,” he continued. ”Long line risks— those with high gross risk made acceptable though controls — need to be checked and audited. Too often, executives are only interested in the high net risks, the shark nearest the canoe. This can result in poor levels of compliance.”

Ludlow said insurers would inevitably learn lessons from the event.

“Insurers should of course price risks appropriately and refuse to pay claims that are due to willful non-compliance, but they also need to ensure that they are not facilitating moral hazard in providing paperwork for illegal operations, safe in the knowledge that they can enjoy premiums and decline claims.”

Baron said the blast, following the Tianjin incident in 2015, would raise questions about the location of industrial sites.

“This is an endless question as we witnessed over the years and across the global the development of residential areas nearby pre-existing industrial and logistics sites. Local authorities in many countries have not been sufficiently focused on health and safety, and more prone to seizing real-estate and population growth development strategies at the expense of people safety. We see the same issue in Nat Cat prone regions.”

Ludlow hopes the event will draw increased scrutiny on the handling of high-risk cargo among logistics firms, shipping companies, and ports, as well as the financial distress of cargo companies.

“Everyone has a role to play when it comes to high-risk cargo. Government authorities, port authorities and logistics firms certainly have a role to play in ensuring that high-risk cargos are not putting others at risk. This shipowner was new to the business, in financial distress, and the ship was in a poor state of repair before it got to Beirut while carrying a high-risk cargo. This scenario needs to be addressed internationally.”