Project Risk

Management

1
 Lecture:2

HISTORY OF RISK
ANALYSIS AND
MANAGEMENT
History of Risk Analysis & Management
Historical perspective on risk analysis applications in society was
given by Covello and Mumpower (1985). Around 3200 B.C. in
the Tigris-Euphrates valley, a group called Asipu served as risk
analysis consultants for people making risky, uncertain, or difficult
decisions.
Greeks and Romans observed causal relationships between
exposure and disease: Hippocrates (Hippocrates of Kos, 4th century
B.C.) considered father of modern medicine correlated occurrence
of diseases with environmental exposures; Vitruvious* (1st
century B.C.) noticed lead toxicity; and Agricola (16th
century A.D.) noticed the correlation between occupational
exposure to mining and health.
*was a Roman author, architect, civil engineer and military engineer during the 1st century BC 3
History of Risk Analysis & Management

Insurance, which started 3900 years ago in Mesopotamia, is

one of the oldest strategies for dealing with risks. In 1950 B.C.,
the Code of Hamurabi formalized bottomry contracts
containing a risk premium for the chance of loss of ships and
cargo. By 750 B.C., Greeks also practiced bottomry. In 1583,
the first life insurance policy was issued in England. In
contemporary society, insurance has developed to deal with a
wide variety of phenomena associated with adverse effects,
from health insurance to mortgage insurance.

4
CODE OF HAMMURABI (1750-1950 B.C.)
Code of Hammurabi is a well preserved Babylonian Law Code of
ancient Mesopotamia. It is oldest deciphered writing of significant
in the world which was enacted by sixth king of Babylon
Hammurabi. Code consists of 282 laws with punishment, Nearly
one-half of code deals with the matters of Contract, establishing
for example, paid workers, wages of skilled person, an ox driver or
a surgeon. It has also clauses on Bottomary. Other provisions are
also there to set the terms of a transaction, establishing liabilities
of a builder that collapses for example a property that is damaged
while left in the care of another. A third code addresses issues
concerning household and family relationship such as inheritance,
divorce, paternity etc. Only one provision appeared to impose
obligation on an official; this provision establishes that a judge
who reaches an incorrect decision is to be fined and removed from
the bench forever. A few provisions address issues related to
military services.
The code was discovered by modern archaeologists in 1901 and
accordingly translated. 5
 History of Risk Analysis & Management
Actuaries (people who calculate insurance premia, based on
historical losses and estimates of the future income from premiums
and losses) are probably the best risk assessors, since the failure in
making accurate predictions about losses and premia income can
result in the loss of the business.
Companies with bad actuaries go bankrupt. Government
interventions to deal with natural or manmade hazards are recorded
in all great civilizations. In order to manage air pollution from
burning coal in London, King Edward (1285) issued an order
forbidding the use of soft coal in kilns, after an unsuccessful trial to
voluntary decrease its use.

6
 Modern Historical Perspective of Risk Analysis
Modern risk analysis has roots in probability theory and the
development of scientific methods for identifying causal links
between adverse health effects and different types of hazardous
activities: Blaise Pascal introduced the probability theory in 1657;
Edmond Halley proposed life-expectancy tables in 1693; and in
1792, Pierre Simon de LaPlace developed a true prototype of
modern quantitative risk analysis with his calculations of the
probability of death with and without smallpox vaccination.
With the rise of capitalism, money use, and interest rates,
there was an increased use of mathematical methods dealing with
probabilities and risks.

7
 Modern Historical Perspective of Risk Analysis
For example, the risk of dying was calculated for insurance purposes
(life-expectancy tables). Physicians in the Middle ages also observed
a correlation between exposures to chemicals or agents and health:
John Evelyn (1620–1706) noticed that smoke in London caused
respiratory problems. He also noticed correlation of scrotal cancer
with occupational exposures to soot in chimney sweeps.
Traditionally, most risk assessments (risk analysis applied in a particular
situation) deal with health effects or, more recently, with the ecological health
or economic well-being (in case of business risk analysis). There are many
types of risk analysis.

(Chimney sweep's cancer called Soot wart, is a squamous cell carcinoma of the skin of
the scrotum. It has the distinction of being the first reported form of occupational cancer, and was
initially identified by Percival Pott in 1775) 8
 Emergence of Risk Analysis & Management in HSE
The Emergence of Risk Analysis in Health, Safety, and
Environmental relating to Industrial hygiene, epidemiology, and
toxicology grew as fields of practice and research late in the 19th
century.
Serious scientific study of the risk factors and adverse effects
associated with technology began early in this century. By the
1930s, a substantial body of scientific evidence had been collected
regarding the quantitative relationships between occupational
exposures to hazardous substances and their effects on human
health. Over the several subsequent decades, scientific research
aimed at identifying appropriate safety margins for exposures had
become well established.
Emergence of Risk Analysis & Management in HSE
Perhaps we can learn from this historical example that “voluntary”
reduction in risks from pollution and technological risks in general are
best achieved by designing and enforcing intelligent environmental
and occupational laws. Carrots and sticks may be more effective in
dealing with environmental and occupational risks (accidents or
pollution) than either sticks or carrots alone! Thus, while we may
choose to believe that industries and individuals sincerely have the
public good in mind when dealing with industrial production,
pollution, and waste management, it is helpful to have laws and
regulations to insure responsible behavior in cases where promises
are not kept because budgetary constraints have pushed
environmental considerations out of the picture.

10
Emergence of Risk Analysis & Management in HSE
The irony is that in most cases improvement in environmental
management also improves the bottom line in the long run and often
in the short run. Thus, budgetary constraints should encourage
environmental protection and pollution prevention since they save
money for the company and save on public health and litigation
costs!
However, as the great physicist Max Plank said, “The new ideas do
not win by the strength of their logic, but because their opponents
eventually die!” Hopefully, the idea of pollution prevention and safe
environmental management, as one of the most obvious ways to
improve profits, will prevail before all of its opponents die!

11
What is Risk Analysis?
We can define risk analysis as a body of knowledge
(methodology) that evaluates and derives a probability of an
adverse effect of an agent (chemical, physical, or other),
industrial process, technology, or natural process.
Definition of an "adverse effect" is a value judgment. It could be
defined as death or disease (in most cases of human health risk
analysis); it could be a failure of a nuclear power plant, or a
chemical plant accident, or a loss of invested money. In some
recent cases of risk analysis, even vaguely defined terms such as
“quality of life” or “sense of community” or “reputation” have
been evaluated using risk analysis.

12
Elements of Risk Analysis and Management

1. Hazard (agent) identification

2. Dose-response relationship (how is quantity, intensity, or
concentration of a hazard related to adverse effect)
3. Exposure analysis (who is exposed? to what and how much?
how long? other exposures?)
4. Risk characterization (reviews all of the previous items and
makes calculations based on data, with all the assumptions
clearly stated; often the conclusion is that more data and/or
improvement in methodology is needed and that no numerical
risk number can be derived to express accurately the
magnitude of risk)

13
Risk

14
 Definition of Risk cont…
Therefore, so far there is no agreed definition of risk. Risk is understood as
an uncertainty and / or outcome of the event.

1. Risk is the probability of an adverse outcome (Graham and Weiner

1995).

2. Risk equals the expected loss (Willis 2007).

3. Risk is a measure of the probability and severity of adverse effects

(Lowrance 1976).

4. Risk is the combination of probability of an event and its consequences

(ISO 2002).

5. Risk is defined as a set of scenarios, each of which has a probability and

a consequence (Kaplan and Garrick 1981, Kaplan 1991).

6. Risk is equal to the combination of events/consequences and associated

uncertainties (Aven 2007).
 Definition of Risk cont…

7. Risk refers to uncertainty of outcome, of actions and events (Mehr,

2002).

8. Risk is a situation or event where something of human value

(including humans themselves) is at stake and where the outcome is
uncertain (Rosa 1998, 2003).

9. Risk is uncertainty about and severity of the consequences of an

activity, with respect to something that humans value (Aven and Renn
2008).

10. Risk refers to situations with known probabilities for the randomness
the decision-maker is faced with (Knight 1921, Douglas 1983).

11. Risk is an unwanted and improbable event, if occurs, influences

organizational or project objective. (S. Mubin, Garyainov 2008)

16
 Common Aspects of Risk
 An expectation of loss
◦ Always an element of uncertainty
◦ Always refers to future
◦ Usually covers both severity and likelihood of a loss
◦ Usually refers to unwanted consequences
Consequence Categories

The consequences of an accident may be classified in

different categories, as
◦ Personnel consequences
 Fatalities
 Impairment
◦ Environmental damage
◦ Economic loss
 Damage to material assets
 Production/service loss
 Rework
◦ Information “loss”
◦ Image (i.e., damage to reputation)
Consequence Categories cont…
Consequence Spectrum
 A consequence spectrum (or, risk picture) of an activity
is a listing of its potential consequences and the
associated probabilities (e.g., per year). Usually, only
unwanted consequences are considered.

 Risk is sometimes defined as:

 This requires that all consequences may be measured

with a common measure (e.g., as monetary value)
20
Probability and Frequency

Probability
Probability (or likelihood) is a measure or estimation of how likely it
is that something will happen or that a statement is true

0.0 p 1.0 or 0% p 100%

Frequency
The number of events per time unit (e.g., per year)
(f = frequency)
f = 5 events per year
Probability Theory

Probability theory is the branch of mathematics

concerned with probability, the analysis
of random phenomena. The central objects of probability
theory are random variables, stochastic processes,
and events: mathematical abstractions of non-
deterministic events or measured quantities that may either
be single occurrences or evolve over time in an apparently
random fashion. If an individual coin toss or the roll
of dice is considered to be a random event, then if repeated
many times the sequence of random events will exhibit
certain patterns, which can be studied and predicted. Two
representative mathematical results describing such
patterns are the law of large numbers and the central
limit theorem.
Probability Theory
Law of Large Numbers (LLN)
In probability theory, the law of large numbers (LLN) is
a theorem that describes the result of performing the same
experiment a large number of times. According to the law,
the average of the results obtained from a large number
of trials should be close to the expected value, and will
tend to become closer as more trials are performed. The LLN
is important because it "guarantees" stable long-term results
for the averages of random events.
Probability Theory
Central Limit Theorem (CLT)
In probability theory, the central limit theorem (CLT) states that,
given certain conditions, the arithmetic mean of a sufficiently large
number of iterates of independent random variables, each with a well-
defined expected value and well-defined variance will be
approximately normally distributed. That is, suppose that
a sample is obtained containing a large number of observations, each
observation being randomly generated in a way that does not depend
on the values of the other observations, and that the arithmetic
average of the observed values is computed. If this procedure is
performed many times, the computed average will not always be the
same each time; the central limit theorem says that the computed
values of the average will be distributed according to the
normal distribution (commonly known as a "bell curve").
 Risk Measure
Broadly risk to people can be expressed
in two complementary forms:

1. Individual risk - the risk experienced

by an individual person;

2. Group (or societal) risk - the risk

experienced by the whole group of
people exposed to the hazard.

25
1. Individual Risks
Definition of Individual Risks
Individual risk is the risk experienced by a single individual in a
given time period. It reflects the severity of the hazards and the
amount of time the individual is in proximity to them. The number
of people present does not significantly affect it.
Individual risk is defined formally (by Institution of Chemical
Engineering, UK) as the frequency at which an individual may be
expected to sustain a given level of harm from the realization of
specified hazards. It is usually taken to be the risk of death, and
usually expressed as a risk per year.
Individual risk may be calculated in various ways, and although
each is consistent with the above definition, the results may differ
substantially. In order to clarify the different approaches, three
main types of individual risk may be distinguished:
a) Location-specific individual risk (LSIR).
b) Individual-specific individual risk (ISIR).
c) Average individual risk. Avg. Individual risk =Number of fatalities/number of people at risk 26
Types of Individual Risk
Location-specific individual risk (LSIR). This is used to indicate the
risk at a particular location. It is the risk for a hypothetical individual who
is positioned there for 24 hours per day, 365 days per year. It is a standard
output from a QRA. Since in reality people do not remain continually at one
location, this is not a realistic risk measure.
Individual-specific individual risk (ISIR). This is a more realistic
estimate of the risk for an individual, taking account of them being at
different locations for different lengths of time per year. Risk estimates
from a QRA are normally converted to this form before comparing with risk
criteria or historical data.
Average individual risk. This is usually calculated from historical data
Individual risk =Number of fatalities/number of people at risk
This is the average ISIR over the group of people included in the data.
Average ISIRs and LSIRs may be also calculated in a QRA. Use of the
distinguishing terms LSIR, ISIR and average IR is less common. This often
causes confusion when comparing individual risks from different studies.
Each of the above forms of individual risk can also be expressed as:
a) Individual risk per year (IRPA)
b) Deaths per million
c) Fatal accident rate 27
a) Individual Risk Per Annum (IRPA)

28
b) Deaths Per Million (DPM)

The number of deaths per million (DPM) in a specified group is

sometimes used as a safety performance measure.

The figure shows the DPM for various age groups in the United
Kingdom based on deaths in 1999. The ‘probability’ that one person
picked at random will die is 10309/106 = 1.03%

http://en.wikipedia.org/wiki/List_of_countries_by_traffic-
related_death_rate 29
Traffic related DPM
In Germany in 2012, there
were 44 traffic related
Deaths Per One Million
inhabitants, people could
drive over 200 mph on public
roads, there were tons of
bikers, and lots of additional
traffic from other countries
passing through because of
Germany's central location in
Europe. There are the
potential factors that would
increase accidents and
fatalities, but Germans are
clearly doing something right,
because in the USA 104
Deaths Per Million were
recorded in 2012.

30
c) Fatal Accident Rate
Individual risks for workers are commonly expressed as a Fatal
Accident Rate (FAR), which is the number of fatalities per 108
exposed hours. FARs are typically in the range 1-30, and are
more convenient and readily understandable than individual risks
per year, which are typically in the range 10-5 - 10-3. The number
of 108 exposed hours is roughly equivalent to the number of hours
at work in 1000 working lifetimes. The FAR measure was developed
to describe occupational risks, which only apply during working
hours. Hence, in studies, 'exposed hours' is taken to mean 'hours
at work', and the FAR is defined in the next slide.

31
c) Fatal Accident Rate
The fatal accident rate (FAR) is the expected number of fatalities
per 108 hours of exposure:

For typical offshore workers, the number of exposed hours is 24

hours per day for 20 weeks per year, i.e. 3360 hours per year, of
which 1680 would actually be on shift. Additional traveling time of,
say, 2 hours per week, would only add 1%, which is negligible. The
differences in working patterns between different countries,
companies or types of worker may, however, be significant. In
general, the number of hours per year spent offshore should be
calculated for the workers in question.
Based on the exposed time suggested above, the conversion from
individual-specific risk to FAR is:

FAR = No. of fatalities xl08/ 3360 hours per year

32
Fatal Accident Rate of various industries

33
Fatal Accident Rate in Exploration and Production Sector
Overall worldwide FAR values for E&P by work location
(onshore/offshore) for all personnel and separately for company
employees and contractors are given below. These values include
fatalities due to air and land transport incidents, except where
indicated. Table 2 presents modification factors that can be used to
factor the values in Table 1 for different functions: exploration,
drilling, production and offshore catering/stewards (but see also
Table 4 for drilling FAR values). Table 3 gives multiplication factors
for different regions of the world that can be applied to the
worldwide FAR values given in Table below to obtain region-
specific FAR values.
Personnel Events All Onshore Offshore
Locations
All Personnel All* 4.44 4.71 3.56

Excl. Air 4.16 - -

Transport
Excl. Land N/A 3.13 N/A
Transport
Company All* 2.08 2.24 1.37
Employees
34
Contractors All* 5.34 5.74 4.15
35
Causes of Fatal Accident (Exploration and Production Sector)

36
Causes of Fatal Accident Excluding Transport and Unknown
(Exploration and Production Sector)

37
 Example 1—Daily Risks.
An interesting perspective on the risks of our daily activity was developed by Imperial
Chemical Industries Ltd.

38
2. Societal Risk

Societal risk = Frequency × magnitude

 Risk (consequences/time)
 Frequency (events/time)
 Magnitude (consequences/event)

Example:
Road accidents in USA
(15 · 106 accidents/year × (1 death/300 accidents)
= 50,000 deaths/year
Individual Risk v/s Societal Risk

Individual risk = Societal risk / Population at risk

Assume 200 million inhabitants in U.S.

50,000 deaths/year / 200 · 106 people

= 2.5 · 10−4 deaths/person-year

that may be expressed as 25 deaths per 100,000 people.

Acceptable Risk
When Do We Accept Risk?

 When we do not know about the risk.

 When the risk is insignificant.
 When the benefit is high compared to the risk.
Accepted Risk

Activities with a fatality risk greater than 1 · 10−3

deaths/year to the general public are generally not
acceptable.

Cars ～3 · 10−3 deaths/person-year

Falls ～ 1 · 10−4 deaths/person-year
Fires ～ 4 · 10−5 deaths/person-year
Drowning ～ 4 · 10−5 deaths/person-year
Firearms ～ 1 · 10−5 deaths/person-year
Poisoning ～ 1 · 10−5 deaths/person-year
Lightning ～ 8 · 10−7 deaths/person-year
Attitudes Towards Risk

 High risk activities are usually on the order of the Disease

mortality rate:
10−2 deaths/person-year

 Low risk activities are usually on the order of the Natural

hazards mortality rate

10−6 deaths/person-year
Issues of Acceptable Risk

 There is no practical definition

 Its perception varies among industries
 It is very hazard specific
 Even government agencies are not consistent
 There are contemporary comparisons that can be made
Establishing Risk Tolerance Limits

Methods:
 Formal analysis
– Cost-benefit tradeoffs are rigorously evaluated

 Professional judgment
– Subjectively based decisions are made by
knowledgeable experts

 “Bootstrapping”
– Proposed new risks are compared to risks that already
exist

– From Clemens and Mohr (2002)

47