...

BERG 2010 Risk Management Procedures, Methods and Experiences

by user

on
Category: Documents
1

views

Report

Comments

Transcript

BERG 2010 Risk Management Procedures, Methods and Experiences
 RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES
Heinz-Peter Berg
•
Bundesamt für Strahlenschutz, Salzgitter, Germany
e-mail: [email protected]
ABSTRACT
Risk management is an activity which integrates recognition of risk, risk assessment, developing
strategies to manage it, and mitigation of risk using managerial resources. Some traditional risk managements
are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death).
Financial risk management, on the other hand, focuses on risks that can be managed using traded financial
instruments. Objective of risk management is to reduce different risks related to a pre-selected domain to an
acceptable. It may refer to numerous types of threats caused by environment, technology, humans,
organizations and politics. The paper describes the different steps in the risk management process which
methods are used in the different steps, and provides some examples for risk and safety management.
1
1.1
INTRODUCTION
Risk
Risk is unavoidable and present in every human situation. It is present in daily lives, public
and private sector organizations. Depending on the context (insurance, stakeholder, technical
causes), there are many accepted definitions of risk in use.
The common concept in all definitions is uncertainty of outcomes. Where they differ is in
how they characterize outcomes. Some describe risk as having only adverse consequences, while
others are neutral.
One description of risk is the following: risk refers to the uncertainty that surrounds future
events and outcomes. It is the expression of the likelihood and impact of an event with the potential
to influence the achievement of an organization's objectives.
The phrase "the expression of the likelihood and impact of an event" implies that, as a
minimum, some form of quantitative or qualitative analysis is required for making decisions
concerning major risks or threats to the achievement of an organization's objectives. For each risk,
two calculations are required: its likelihood or probability; and the extent of the impact or
consequences.
Finally, it is recognized that for some organizations, risk management is applied to issues
predetermined to result in adverse or unwanted consequences. For these organizations, the
definition of risk which refers to risk as "a function of the probability (chance, likelihood) of an
adverse or unwanted event, and the severity or magnitude of the consequences of that event" will be
more relevant to their particular public decision-making contexts.
79
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES 1.2
Risk Management
Two different safety management principles are possible: consequence based safety
management will claim that the worst conceivable events at an installation should not have
consequences outside certain boundaries, and will thus design safety systems to assure this. Risk
based safety management (usually called risk management) maintains that the residual risk should
be analysed both with respect to the probabilistic and the nature of hazard, and hence give
information for further risk mitigation. This implies that very unlikely events might, but not
necessarily will, be tolerated.
Risk management is not new tool and a lot of standards and guidance documents are available
(ACT 2004, AZ/NZS 2004, Committee 2004, DGQ 2007, FAA 2007, HB 2004, IEC 2008, ON
2008, Rio Tinto 2007, Treasury Board of Canada 2001). It is an integral component of good
management and decision-making at all levels of an organization. All departments in an
organization manage risk continuously whether they realize it or not, sometimes more rigorously
and systematically, sometimes less. More rigorous risk management occurs most visibly in those
departments whose core mandate is to protect the environment and public health and safety. At
present, a further generic standard on risk management is in preparation as a common ISO/IEC
standard (IEC 2007) describing a systemic top down as well as a functional bottom up approach
(see Fig. 1) This standard is intended to support existing industry or sector specific standards.
Figure 1. Approach of the planned generic standard on risk management.
As with the definition of risk, there are equally many accepted definitions of risk management
in use. Some describe risk management as the decision-making process, excluding the identification
and assessment of risk, whereas others describe risk management as the complete process, including
risk identification, assessment and decisions around risk issues.
80
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES One well accepted description of risk management is the following: risk management is a
systematic approach to setting the best course of action under uncertainty by identifying, assessing,
understanding, acting on and communicating risk issues.
In order to apply risk management effectively, it is vital that a risk management culture be
developed. The risk management culture supports the overall vision, mission and objectives of an
organization. Limits and boundaries are established and communicated concerning what are
acceptable risk practices and outcomes.
Since risk management is directed at uncertainty related to future events and outcomes, it is
implied that all planning exercises encompass some form of risk management. There is also a clear
implication that risk management is everyone's business, since people at all levels can provide some
insight into the nature, likelihood and impacts of risk.
Risk management is about making decisions that contribute to the achievement of an
organization's objectives by applying it both at the individual activity level and in functional areas.
It assists with decisions such as the reconciliation of science-based evidence and other factors; costs
with benefits and expectations in investing limited public resources; and the governance and control
structures needed to support due diligence, responsible risk-taking, innovation and accountability.
A typical decision support for risk and safety management at strategic, normative and
operational level is provided in (JCSS 2008).
1.3
Integrated Risk Management
The current operating environment is demanding a more integrated risk management
approach (see Bolvin et al. 2007 and Treasury Board of Canada 2001). It is no longer sufficient to
manage risk at the individual activity level or in functional silos. Organizations around the world
are benefiting from a more comprehensive approach to dealing with all their risks.
Today, organizations are faced with many different types of risk (e.g., policy, program,
operational, project, financial, human resources, technological, health, safety, political). Risks that
present themselves on a number of fronts as well as high level, high -impact risks demand a coordinated, systematic corporate response.
Thus, integrated risk management is defined as a continuous, proactive and systematic
process to understand, manage and communicate risk from an organization-wide perspective. It is
about making strategic decisions that contribute to the achievement of an organization's overall
corporate objectives.
Integrated risk management requires an ongoing assessment of potential risks for an
organization at every level and then aggregating the results at the corporate level to facilitate
priority setting and improved decision-making. Integrated risk management should become
embedded in the organization's corporate strategy and shape the organization's risk management
culture. The identification, assessment and management of risk across an organization helps reveal
the importance of the whole, the sum of the risks and the interdependence of the parts.
Integrated risk management does not focus only on the minimization or mitigation of risks,
but also supports activities that foster innovation, so that the greatest returns can be achieved with
acceptable results, costs and risks.
From a decision-making perspective, integrated risk management typically involves the
establishment of hierarchical limit systems and risk management committees to help to determine
the setting and allocation of limits. Integrated risk management strives for the optimal balance at the
corporate level. However, companies still vary considerably in the practical extent to which
important risk management decisions are centralised (Basel Committee on Banking Supervision
2003).
81
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES 1.4
Safety management
Apart from reliable technologies, the operational management of a industrial plant with high
risk potential is also a highly important factor to ensure safe operation. Owing to the liberalisation
of the markets and resulting cost pressure to the industries, the importance of operational
management is growing since cost savings in the areas of personnel and organization result in
reducing the number of personnel together with changes in the organizational structure and tighter
working processes.
For small- and medium-sized companies, specific support is necessary and provided in
(Rheinland-Pfalz 2008).
Experience with accidents in different branches of industry shows the importance of safe
operational management. Today, effective safety management is seen as one crucial element of safe
operational management (Hess & Gaertner 2006).
The term safety management subsumes the entirety of all activities relating to the planning,
organization, management and supervision of individuals and work activities with a view to the
efficient achievement of a high degree of safety performance, i.e. the achievement of a high quality
of all activities that are important to safety, and to the promotion of a highly developed safety
culture. Safety management is not limited to certain organization units but comprises the entire
safety-related organization of the company. Safety management is the responsibility of the
management level of a company.
For example in case of nuclear power plant in Germany (see ICBMU 2004), the licensee is
according to the Atomic Energy Act responsible for the safety of the plant he operates. To fulfil the
conditions associated with this responsibility, he has to implement an effective safety management
system that complies with the requirements of the current regulations and with international
standards. Typical management systems in nuclear power plants are described in (GRS 2007).
Sometimes risk management and safety management are seen as the same type of
management, but in practice safety management is a main and important part of the risk
management which also covers, e.g. financial risks.
2
RISK MANAGEMENT STEPS AND TOOLS
The risk management steps (see Fig. 2) are:
1. Establishing goals and context (i.e. the risk environment),
2. Identifying risks,
3. Analysing the identified risks,
4. Assessing or evaluating the risks,
5. Treating or managing the risks,
6. Monitoring and reviewing the risks and the risk environment regularly, and
7. Continuously communicating, consulting with stakeholders and reporting.
Some of the risk management tools are described in (IEC 2008) and (Oehmen 2005).
2.1
Establish goals and context
The purpose of this stage of planning enables to understand the environment in which the
respective organization operates, that means to thoroughly understand the external environment and
the internal culture of the organization. The analysis is undertaken through:
− establishing the strategic, organizational and risk management context of the organization,
and
− identifying the constraints and opportunities of the operating environment.
82
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES Basis for risk management
established by company
DOCUMENTATION
Establishing context
Risk identification
Risk monitoring and
review
Risk analysis
Risk control and
coverage
Risk assessment
Figure 2. Risk management process.
The establishment of the context and culture is undertaken through a number of
environmental analyses that include, e.g., a review of the regulatory requirements, codes and
standards, industry guidelines as well as the relevant corporate documents and the previous year’s
risk management and business plans.
Part of this step is also to develop risk criteria. The criteria should reflect the context defined,
often depending on an internal policies, goals and objectives of the organization and the interests of
stakeholders. Criteria may be affected by the perceptions of stakeholders and by legal or regulatory
requirements. It is important that appropriate criteria be determined at the outset.
Although the broad criteria for making decisions are initially developed as part of establishing
the risk management context, they may be further developed and refined subsequently as particular
risks are identified and risk analysis techniques are chosen. The risk criteria must correspond to the
type of risks and the way in which risk levels are expressed.
Methods to assess the environmental analysis are SWOT (Strength, Weaknesses,
Opportunities and Threats) and PEST (Political, Economic, Societal and Technological)
frameworks, typically shown as tables.
2.2
Identify the risks
Using the information gained from the context, particularly as categorised by the SWOT and
PEST frameworks, the next step is to identify the risks that are likely to affect the achievement of
the goals of the organization, activity or initiative. It should be underlined that a risk can be an
opportunity or strength that has not been realised.
Key questions that may assist your identification of risks include:
− For us to achieve our goals, when, where, why, and how are risks likely to occur?
− What are the risks associated with achieving each of our priorities?
− What are the risks of not achieving these priorities?
− Who might be involved (for example, suppliers, contractors, stakeholders)?
83
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES The appropriate risk identification method will depend on the application area (i.e. nature of
activities and the hazard groups), the nature of the project, the project phase, resources available,
regulatory requirements and client requirements as to objectives, desired outcome and the required
level of detail.
The use of the following tools and techniques may further assist the identification of risks:
− Examples of possible risk sources,
− Checklist of possible business risks and fraud risks,
− Typical risks in stages of the procurement process,
− Scenario planning as a risk assessment tool ,
− Process mapping, and
− Documentation, relevant audit reports, program evaluations and / or research reports.
Specific lists, e.g. from standards, and organizational experience support the identification of
internal risks. To collect experience available in the organization regarding internal risks, people
with appropriate knowledge from the different parts of the organization should be involved in
identifying risks. Creativity tools support this group process (see Fig. 3).
The identification of the sources of the risk is the most critical stage in the risk assessment
process. The sources are needed to be managed for pro-active risk management. The better the
understanding of the sources, the better the outcomes of the risk assessment process and the more
meaningful and effective will be the management of risks.
Synectics
Visualisation
Bioziation
Brainstorming
Brainwriting
6-3-5 method
DELPHI
Association
methods
Methods of
systematic
variation
Analogy methods
Creativity
methods
Provocation
method and
random input
Visual protection
Pincards
Checklist
Osborn-Checklist
Morphological
analysis
Figure 3. Creativity tools.
Key questions to ask at this stage of the risk assessment process to identify the impact of the
risk are:
− Why is this event a risk?
− What happens if the risk eventuates?
− How can it impact on achieving the objectives/outcomes?
Risk identification of a particular system, facility or activity may yield a very large number of
potential accidental events and it may not always be feasible to subject each one to detailed
quantitative analysis. In practice, risk identification is a screening process where events with low or
trivial risk are dropped from further consideration.
However, the justification for the events not studied in detail should be given. Quantification
is then concentrated on the events which will give rise to higher levels of risk. Fundamental
84
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES methods such as Hazard and Operability (HAZOP) studies, fault trees, event tree logic diagrams
and Failure Mode and Effect Analysis (FMEA) are tools which can be used to identify the risks and
assess the criticality of possible outcomes.
An example of a systematic method for identifying technical risks of a plant is the elaboration
of a risk register where different types of risks and damage classes are correlated to local areas of a
plant (cf. Fig. 4).
amount of damages
storage
for
chemicals
external
storage area
compactor
surface
treatment
high
medium
low
prefabrication
Type of hazard
storage
for manufactured
goods
mounting
environmental
oil tank
fire
other hazard
Figure 4. Example of a risk register.
2.3
Analyse the risk
Risk analysis involves the consideration of the source of risk, the consequence and likelihood
to estimate the inherent or unprotected risk without controls in place. It also involves identification
of the controls, an estimation of their effectiveness and the resultant level of risk with controls in
place (the protected, residual or controlled risk). Qualitative, semi-quantitative and quantitative
techniques are all acceptable analysis techniques depending on the risk, the purpose of the analysis
and the information and data available.
Often qualitative or semi-quantitative techniques can be used for screening risks whereas
higher risks are being subjected to more expensive quantitative techniques as required. Risks can be
estimated qualitatively and semi-quantitatively using tools such as hazard matrices, risk graphs, risk
matrices or monographs but noting that the risk matrix is the most common.
Applying the risk matrix, it is required to define for each risk its profile using likelihood and
consequences criteria. Typical definitions of the likelihood and consequence are contained in the
risk matrix (cf. Table 1).
Using the consequence criteria provided in the risk matrix, one has to determine the
consequences of the event occurring (with current controls in place).
To determine the likelihood of the risk occurring, one can apply the likelihood criteria (again
contained in the risk matrix). As before, the assessment is undertaken with reference to the
effectiveness of the current control activities.
To determine the level of each risk, one can again refer to the risk matrix. The risk level is
identified by intersecting the likelihood and consequence levels on the risk matrix.
Complex risks may involve a more sophisticated methodology. For example, a different
approach may be required for assessing the risks associated with a significantly large procurement.
85
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES Table 1. Example of a risk matrix
Consequence
Significance
1
2
3
4
5
Insignificant
Impact
Minor Impact
Moderate- Minor
to Small
Population
Impact to Large
Population
Major
Impact
Catastrophic
–
to Small
Major
Impact to
Large
Population
Likelihood
Population
1
Rare
Low
Low
Moderate
High
High
2
Unlikely
Low
Low
Moderate
High
Very High
3
Moderate /
Possible
Low
Moderate
High
Very High
Very High
4
Likely
Moderate
High
High
Very High
Extreme
5
Almost Certain
Moderate
High
Very High
Extreme
Extreme
Special approaches exist to analyse major risk in complex projects, e. .g. described in (Cagno
et al. 2007).
2.4
Evaluate the risk
Once the risks have been analysed they can be compared against the previously documented
and approved tolerable risk criteria. When using risk matrices this tolerable risk is generally
documented with the risk matrix. Should the protected risk be greater than the tolerable risk then the
specific risk needs additional control measures or improvements in the effectiveness of the existing
controls.
The decision of whether a risk is acceptable or not acceptable is taken by the relevant
manager. A risk may be considered acceptable if for example:
− The risk is sufficiently low that treatment is not considered cost effective, or
− A treatment is not available, e.g. a project terminated by a change of government, or
− A sufficient opportunity exists that outweighs the perceived level of threat.
If the manager determines the level of risk to be acceptable, the risk may be accepted with no
further treatment beyond the current controls. Acceptable risks should be monitored and
periodically reviewed to ensure they remain acceptable. The level of acceptability can be
organizational criteria or safety goals set by the authorities.
2.5
Treat the risk
An unacceptable risk requires treatment. The objective of this stage of the risk assessment
process is to develop cost effective options for treating the risks. Treatment options (cf. Fig. 5),
which are not necessarily mutually exclusive or appropriate in all circumstances, are driven by
outcomes that include:
− Avoiding the risk,
− Reducing (mitigating) the risk,
− Transferring (sharing) the risk, and
− Retaining (accepting) the risk.
Avoiding the risk - not undertaking the activity that is likely to trigger the risk.
Reducing the risk - controlling the likelihood of the risk occurring, or controlling the impact
of the consequences if the risk occurs.
86
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES Avoid risk
Mitigate
risk
Transfer
risk
Analyse risk
Monitor and
review risk
Accept
risk
Treatment of risks
Figure 5. Treatment of risks
Factors to consider for this risk treatment strategy include:
− Can the likelihood of the risk occurring be reduced? (through preventative maintenance, or
quality assurance and management, change in business systems and processes), or
− Can the consequences of the event be reduced? (through contingency planning, minimizing
exposure to sources of risk or separation/relocation of an activity and resources).
Examples for the mitigation activity effectiveness are described in (Wirthin 2006).
Transferring the risk totally or in part - This strategy may be achievable through moving the
responsibility to another party or sharing the risk through a contract, insurance, or partnership/joint
venture. However, one should be aware that a new risk arises in that the party to whom the risk is
transferred may not adequately manage the risk!
Retaining the risk and managing it - Resource requirements feature heavily in this strategy.
The next step is to determine the target level of risk resulting from the successful
implementation of the preferred treatments and current control activities.
The intention of a risk treatment is to reduce the expected level of an unacceptable risk. Using
the risk matrix one can determine the consequence and likelihood of the risk and identify the
expected target risk level.
2.6
Monitoring the risk
It is important to understand that the concept of risk is dynamic and needs periodic and formal
review.
The currency of identified risks needs to be regularly monitored. New risks and their impact
on the organization may to be taken into account.
This step requires the description of how the outcomes of the treatment will be measured.
Milestones or benchmarks for success and warning signs for failure need to be identified.
The review period is determined by the operating environment (including legislation), but as a
general rule a comprehensive review every five years is an accepted industry norm. This is on the
basis that all plant changes are subject to an appropriate change process including risk assessment.
The review needs to validate that the risk management process and the documentation is still
valid. The review also needs to consider the current regulatory environment and industry practices
which may have changed significantly in the intervening period.
The organisation, competencies and effectiveness of the safety management system should
also be covered. The plant management systems should have captured these changes and the review
should be seen as a ‘back stop’.
The assumptions made in the previous risk assessment (hazards, likelihood and consequence),
the effectiveness of controls and the associated management system as well as people need to be
monitored on an on-going basis to ensure risk are in fact controlled to the underlying criteria.
For an efficient risk control the analysis of risk interactions is necessary.
87
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES Interactive
Interactive
risk
risk
Proactive
Proactive
risk
risk
Independent
Independent
risk
risk
Core
Risk
Reactive
Reactive
risk
risk
Figure 6. Results of a cross impact analysis.
This ensures that the influences of one risk to another is identified and assessed. Usual
method for that purpose are a cross impact analysis (cf. Fig. 6), Petri nets or simulation tools.
A framework needs to be in place that enables responsible officers to report on the following
aspects of risk and its impact on organizations´ operations:
− What are the key risks?
− How are they being managed?
− Are the treatment strategies effective? – If not, what else must be undertaken?
− Are there any new risks and what are the implications for the organization?
2.7
Communication and reporting
Clear communication is essential for the risk management process, i.e. clear communication
of the objectives, the risk management process and its elements, as well as the findings and required
actions as a result of the output.
Risk management is an integral element of organization´s management. However, for its
successful adoption it is important that in its initial stages, the reporting on risk management is
visible through the framework. The requirements on the reporting have to be fixed in a qualified
and documented procedure, e. g., in a management handbook. The content of such a handbook is
shown in Figure 7.
2. Risk
categories
1. Fundamental
policy
3. Risk
management
process
4.Risk
organisation
Figure 7. Structure of a risk management handbook.
Documentation is essential to demonstrate that the process has been systematic, the methods
and scope identified, the process conducted correctly and that it is fully auditable. Documentation
88
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES provides a rational basis for management consideration, approval and implementation including an
appropriate management system.
A documented output from the above sections (risk identification, analysis, evaluation and
controls) is a risk register for the site, plant, equipment or activity under consideration. This
document is essential for the on-going safe management of the plant and as a basis for
communication throughout the client organisation and for the on-going monitor and review
processes. It can also be used with other supporting documents to demonstrate regulatory
compliance.
3
3.1
EXAMPLES
NASA risk management to the SOFIA programm
NASA and DLR (German Aerospace Center) have been working together to create the
Stratospheric Observatory For Infrared Astronomy (SOFIA). SOFIA is a Boing 747SP (Special
Performance) aircraft, extensively modified to accommodate a 2.5 meter reflecting telescope and
airborne mission control system. In (Datta 2007) it is shown how the SOFIA program handled one
safety issue through appropriate use of NASA`s Risk Management Process based on (NASA 2002).
3.1.1 Risk identification
The safety issue was identified while reviewing the Probabilistic Risk Assessment of a
depressurization scenario in the telescope cavity. The failure scenario itself was previously known
where a leak in the telescope cavity door seal sucks air out from the telescope cavity creating a
negative pressure differential between the telescope cavity and the aft cavity. Two negative pressure
relief valves were designed to handle this and other cavity negative pressure scenarios. However,
the proposed new scenario had a leak area that was beyond the original design basis. Nevertheless,
this failure scenario was deemed credible but with a lower probability of occurrence.
3.1.2 Risk analysis
After identification of the safety issue, both the risk management and the engineering
processes required an analysis of this depressurization scenario. Multiple models of the
depressurization scenarios were created and analyzed at peak dynamic pressures. The results
revealed that under some failure scenarios the relief valves might not be redundant. Both valves
need to function for adequate pressure equalization without exceeding structural design loads.
These conditions created a program risk state that needed to be mitigated.
All considerations within the risk analysis were based on prescribed project risk definitions.
3.1.3 Risk control
As a result, the program started a risk mitigation plan where a test will be performed to
characterize the seal failure scenario by intentionally deflating the seal at lower dynamic pressure.
This risk continues to reside in the SOFIA program risk list so as to ensure that the risk
mitigation plan is carried out in the future. The risk list is the listing of all identified risks in priority
order from highest to lowest risk, together with the information that is needed to manage each risk
and document its evolution over the course of the program. The highest risks are extracted from the
list. The negative pressure relief valve risk has not yet reached among the top fifteen list of risks
(see Datta 2007).
89
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES 3.2
Construction of a nuclear power plant
Risk identification and risk analysis can not only be performed on component or system level,
but also for a comprehensive technical project such as a (nuclear) power plant.
3.2.1 Risk context
Since many years, no new nuclear power plant has been constructed in USA. However, in
near future, decisions have to be made which types of power plants will reset the nuclear power
plants which have to be shut down in the next ten years. Thus, for a new project the resulting risks
have to be evaluated.
The risk context is determined by the electricity market, the license, the technical aspects of
the design, the construction of the plant, the operation of the new plant as well as the financing of
the project.
3.2.2 Risk identification
On the background of this context, a potential operator has to take into account the following
risks:
− Licensing risks: will the plant be licensed in a predictable time schedule or will this be a
longer procedure, which strongly influences the start of the commercial operation.
− Design risks: is the plant completely designed before construction or are surprises to be
expected which lead to cost- intensive changes of the plant and delay of the construction period.
− Technical risks: will the plant behave as planned or will unknown technical problems lead
to shut down and thus fail the projected goals.
− Cost risks: will the plant to more expensive as planned and the chances in the free
electricity market reduced.
− Time schedule risks: will the plant start the production at the scheduled time or have delays
to be expected.
− Finance risks: which possible uncertainties have to be taken into account by investors with
respect to the new project, e.g., how is the public acceptance of a new nuclear power plant.
3.2.3 Risk analysis
In a specific case, General Electric has analysed the risk of constructing a new plant in the
following manner:
− License risks: the new reactor type has been developed in accordance with current nuclear
safety standards and is already certified site-independently by the US licensing authority. Moreover,
this type of reactor has already been licensed in Japan, where two plants are running successfully
since five years.
− Design risks: the reactor type is completely planned with all necessary drawings. Material
and costs are exactly known.
− Technical risks: the plants constructed in Japan have a total operating time of ten years
with a high availability.
− Finance risks: main problem is the financing of a new nuclear power plant project because
of experiences in the eighties with construction times up to 15 years.
90
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES 3.2.4 Risk evaluation
Following this risk analysis, an evaluation of the risks has been the next step:
− License risk: the experiences listed in the risk analysis lead to the expectations that the
licensing process should not last more than one year.
− Design risk: due to the completely available design documentation no larger deviations are
expected that result in expensive delays.
− Technical risk: the risk evaluation of the potential operator and the investors will not only
be based on the expected high availability, but also on the occurrence frequency of an accident and
the acceptance by the public in comparison with other energy producing systems.
3.2.5 Risk treatment
General Electric has chosen from the different alternatives to treat risks as described in 2.5 to
retain and accept the risks for costs and time schedule by offering a fixed price and a construction
time which will be determined in the contract.
3.3
National foresight program "Poland 2020"
Totally different and more global types of risk management are so-called foresight programs.
Foresight means a systematic method of building a medium and long-term vision of development of
the scientific and technical policy, its directions and priorities, used as a tool for making on-going
decisions and mobilizing joint efforts. The aim of foresight is to indicate future needs, opportunities
and threats associated with the social and economic growth and to plan appropriate measures in the
field of science and technology.
The scope of realization of the National Foresight Programme “Poland 2020” (see Fig. 8)
covers the three research areas “sustainable development of Poland”, “information and
telecommunications technologies” and “security”.
Figure 8. Cover of the brochure describing the Polish foresight program.
91
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES The aim of the National Foresight Programme “Poland 2020” is to:
− lay out the development vision of Poland until the year 2020,
− set out – through a consensus with the main beneficiaries – the priority paths of scientific
research and development which will, in the long run, have an impact on the acceleration of the
social and economic growth,
− put the research results into practice and create preferences for them when it comes to
allotting funds from the budget,
− adjust the Polish scientific policy to the requirements of the European Union,
− shape the scientific and innovative police towards knowledge-based economy.
For the purpose of foresight, different methods can be applied to prepare long-term
development scenarios (see Table 2).
Foresight can never be completely dominated by quantitative methods: the appropriate mix of
methods depends on access to relevant expertise and the nature of the issues.
Various foresight methods are planned to be used in the National Foresight Programme
“Poland 2020”, among which the following methods will be the leading ones:
− Expert panels,
− SWOT analysis,
− Delphi analysis,
− PEST analysis,
− Cross-impact analysis,
− Scenarios of development.
Table 2. Methods typically used for foresight programs
Categories by Criteria
Methods
Quantitative methods (use of
statistics and other data) to elaborate
future trends and impacts
− Trend extrapolation
− Simulation modelling
− Cross impact analysis
− System dynamics
− Delphi method
Qualitative methods (drawing on
expert knowledge) to develop long
term strategies
− Experts panels
− Brainstorming
− Mindmapping
− Scenario analysis workshops
− SWOT analysis
− Critical/ key technologies
Methods to identify key points of
action to determine planning
strategies
3.4
− Relevance trees
− Morphological analysis
Risk management in the sector of banks and insurance companies
Basel II and the Capital Requirements Directive (Committee for 2005) are especially
important for banks and small and medium sized companies. Rules on capital requirements are
designed to protect savers and investors from the risk of the failure or bankruptcy of banks. They
ensure that these institutions hold a minimum amount of capital. The Capital Requirements
Directive was adopted on 14 June 2006 and comes into force January 2007 with full
implementation by 2008. Capital adequacy rules set down the amount of capital a bank or credit
institution must hold. This amount is based on risk.
Therefore, it is expected that this rules will have an important influence on the establishment
of a risk management system.
92
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES Three main issues of the Capital Requirements Directive are:
− the new directive is more risk sensitive,
− costs to smaller banks and consequently to small-company growth, where the EU lags
other regions, and
− moral hazard concerns in that risks are partly passed to insurers and banks, unlike insurers
have potential last resort support from central banks.
Some commentators argue that strengthening the capital base of banks and encouraging the
management of risk does not reduce the risk but merely passes it on elsewhere. Credit risk in
particular is being passed on to insurance companies and funds, which are in turn passing it on to
householders, i. e., one can ask the question whether ultimately, it may be the consumer who stands
to lose if things go wrong.
Comparable to Basel II for the banks and investment institutions will Solvency II
fundamentally change and support risk management of the insurance companies. The requirements
on the capital equipment will then depend on the risk profile of the insurance company. Besides the
quantitative determination of the capital equipment it is part of Solvency II to determine the internal
risk management.
Basis in economics and finance is the so-called value at risk (VaR) method. VaR is the
maximum loss, not exceeded with a given probability defined as the confidence level, over a given
period of time. Although VaR is a very general concept that has broad applications, it is most
commonly used by security firms or investment banks to measure the market risk of their asset
portfolios (market value at risk). VaR is widely applied in finance for quantitative risk management
for many types of risk. VaR does not give any information about the severity of loss by which it is
exceeded.
A variety of models exist for estimating VaR. Each model has its own set of assumptions, but
the most common assumption is that historical market data is the best estimator for future changes.
Common models include:
− variance-covariance, assuming that risk factor returns are always (jointly) normally
distributed and that the change in portfolio value is linearly dependent on all risk factor returns,
− the historical simulation, assuming that asset returns in the future will have the same
distribution as they had in the past (historical market data),
− Monte Carlo simulation, where future asset returns are more or less randomly simulated.
In (Taleb 2007 a, b), VaR is seen as a dangerously misleading tool. Two issues are mentioned
with regard to conventional calculation and usage of VaR:
− Measuring probabilities of rare events requires study of vast amounts of data. For example,
the probability of an event that occurs once a year can be studied by taking 4-5 years of data. But
high risk-low probability events like natural calamities, epidemics and economic disasters (like the
bank crash of 1929) are once a century events which require at least 2-3 centuries of data for
validating hypotheses. Since such data does not exist in the first place, it is argued, calculating risk
with any accuracy is not possible.
− In the derivation of VaR normal distributions are assumed wherever the frequency of
events is uncertain.
Although many problems are similar for the banking and insurance sector respectively, there
are some distinctions between these two kinds of companies. Banks mainly deal with bounded
risks, e. g., facing credit risks. On the other hand, insurance companies often have to consider
unbounded risks, e. g., when heavy-tailed distributed financial positions are present. To address
both situations, one always treats integrable but not necessarily bounded risks in this work.
Furthermore, a main issue will be to develop risk management tools for dynamic models. These
naturally occur when considering portfolio optimisation problems or in the context of developing
reasonable risk measures for final payments or even stochastic processes. One considers only
models in discrete time and denotes these approaches with dynamic risk management. In dynamic
93
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES economic models one often faces a Markov structure of the underlying stochastic processes (Mundt
2008).
Systemic financial risk is the most immediate and the most severe. With so many potential
consequences of the 2007 liquidity crunch unresolved, the outlook for the future is uncertain (WEF
2008).
The crisis of Société Générale in connection with the real estate credits in the US in
2007/2008 and the breakdown of further US banks in September 2008 might be a symptom for the
fact that banks are underestimating the risks or do not apply the risk management tools in an
appropriate manner.
4
CONCLUDING REMARKS
Risk management is, at present, implemented in many large as well as small and medium
sized industries. In (Gustavsson 2006) it is outlined how a large company can handle its risks in
practice and contains a computer based method for risk analysis that can generate basic data for
decision-making in the present context. In that study, Trelleborg AB has been chosen as an example
to illustrate the difficulties that can be encountered concerning risk management in a large company
with different business areas. One typical difficulty is reaching the personnel. Another typical
weakness is a missing system for controlling and following up on the results of the risk analysis that
has been performed.
However, not only industries but also governmental organizations, research institutes and
hospitals are now introducing risk management to some extent.
In case of hospitals. patient safety is endangered, e. g., by adverse events during medical
treatment. Patient safety can be increased through risk management which reduces errors through
error prevention. This presupposes the recognition of causes for errors and near misses which can
be achieved through a critical incident reporting system (CIRS) with a detailed incident reporting
form. CIRS is seen as an important instrument in the process of risk management and is, at present,
of increasing importance and Switzerland and Germany.
Why is it important to have risk management in mind when performing risk assessment? The
different tools support the answer to the following questions:
− risk analysis – how safe is the system, process or item to be investigated,
− risk evaluation – how safe is safe enough, e.g. by comparing the results of the risk analysis
with prescribed safety criteria,
− risk management – how to achieve and ensure an adequate level of safety.
Thus, the results of technical risk assessments are one (often very important) part of an overall
risk or safety assessment of an organization.
A further step is to couple knowledge management with risk management systems to capture
and preserve lessons learned as described in (NASA 2007).
REFERENCES
[40] ACT Insurance Authority 2004. Risk Management Toolkit. February 2004.
[41] AZ/NZS 4360 2004. Risk Management. Standards Australia International Ltd, Sydney.
[42] Basel Committee on Banking Supervision 2003. Trends in Risk Integration and Aggregation, Basel,
August 2003.
[43] Bolvin C., Farret, R., Salvi, O. 2007. Convergence towards integrated risk management: results from
the European SHAPE-RISK project and other initiatives. Proc. ESREL 2007: 1683 – 1687.
[44] Cagno, E., Caron, F., Mancini, M. 2007. A multi-dimensional analysis of major risks in complex
projects. Risk Management: 1–18.
[45] Committee for European Banking Supervisors 2005. Consultation Paper on the Supervisory Review
Process under Pillar II of the Revised Basel Accord, Basel II), June 2005.
94
RT&A # 2(17) (Vol.1) 2010, June Heinz‐Peter Berg – RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES [46] Committee of Sponsoring Organizations of the Treadway Commission (ed.) 2004. Enterprise Risk
Management – Integrated Framework – Application Techniques. September 2004.
[47] Datta, K. 2007. The application of the NASA risk management to the SOFIA program. Proc.
Reliability and Maintainability Symposium 2007, Orlando, January 2007, 410 – 413.
[48] Deutsche Gesellschaft für Qualität e.V. 2007. Risk Management. DGQ 12 – 41, Beuth-Verlag,
Berlin, April 2007 (in German).
[49] Federal Aviation Administration 2007. Safety Risk Management Guidance for System Organization.
SRMGSA-Final Version 1.4a, February 2007.
[50] Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (ICBNU) 2004.
Fundamentals of Safety Management Systems in Nuclear Power Plants. June 2004.
[51] Federation of European Risk Management Associations 2003. A Risk Management Standard.
[52] Gesellschaft für Anlagen- und Reaktorsicherheit mbH (GRS) 2007. Management Systems in Nuclear
Power Plants. GRS-229, Cologne, August 2007 (in German).
[53] Gustavsson, H. 2006. A Risk Management Framework Designed for Trelleborg AB. Report 5195.
[54] HB 436 2004. Handbook Risk Management Guidelines. Standards Australia International Ltd.,
Sydney 2004.
[55] Hess, S.M., Gaertner, J. P. 2006. Application of risk management as a cornerstone in ensuring
nuclear plant safety. Proc. of the 8th International Conference on Probabilistic Safety Assessment and
Management, May, 14 – 18, 2006, New Orleans, paper PSAM-0477.
[56] International Electrotechnical Commission (IEC) 2008. Draft IEC 31010 Ed. 1.0, Risk Management
– Risk Assessment Techniques. May 2008.
[57] International Standardization Organization 2007. Draft ISO 31000, Risk Management Guidelines on
Principles and Implementation of Risk Management. Final version to be issued in 2009.
[58] Joint Committee of Structural Safety (JCSS) 2008. Risk Assessment in Engineering, Principles,
System Representation and Risk Criteria. JCSS, June 2008.
[59] Mundt, A.P. 2008. Dynamic risk management with Markov decision process. Universitätsverlag
Karlsruhe, 2008.
[60] NASA 2002. Risk Management Procedural Requirements. NPR 8000.4, April 2002.
[61] NASA 2007. Exploration Systems, Risk Management Plan. August 2007.
[62] Oehmen, J. 2005. Approaches to Crisis Prevention in Lean Product Development by High
Performance Teams and through Risk Management. Munich, September 2005.
[63] Oesterreichisches Normungsinstitut 2008. ONR 49000 Risikomanagement für Organisationen und
Systeme. (in German).
[64] Rheinland-Pfalz 2008. SGU-Leitfaden. (in German).
[65] Rio Tinto 2007. Risk Policy and Standard. August 2007.
[66] Taleb, N. 2007 a. The Black Swan: The Impact of the Highly Improbable. Penguin, London.
[67] Taleb, N. 2007 b. Epistemology and risk management. Risk & Regulation Magazine, Summer 2007.
[68] Treasury Board of Canada 2001. Integrated Risk Management Framework. April 2001.
[69] Wirthin, R. 2006. Managing Risk and Uncertainty: Traditional Methods and the Lean Enterprise.
MIT/LAI, Presentation April 18, 2006.
World Economic Forum (WEF) 2008. Global Risks 2008, A Global Risk Network Report. Cologny/Geneva,
January 2008.
95
Fly UP