Instruments and Approaches in Risk Analysis Session 3 Dr. Bijan Khazai Risk Analysis Fundamentals of Risk Analysis 1.

Instruments and Approaches in Risk Analysis

Session 3

Dr. Bijan Khazai

Risk AnalysisFundamentals of Risk Analysis 1

Risk AnalysisFundamentals of Risk Analysis

Learning objectives

Learn Probabilistic concept of risk. Concepts of return period, loss-frequency curve, average annual

loss. Sources of uncertainty in risk analysis.

Understand Difference between probabilistic and deterministic risk analysis. Outcomes of a scenario analysis. Depiction and ranking of risk through risk matrix and risk

indexing. Components of a loss estimation model. Methodology of a cost-benefit analysis. Uses of a participatory risk analysis.

2

Risk AnalysisFundamentals of Risk Analysis

RiskThere are two approaches to defining risk:

Probabilistic Approach: Risk is defined as the likelihood (i.e., probability) of sustaining a

certain level of loss during a given time period. Risk = Probability of an event occurring x impact of the event

Deterministic Approach: The geographical distribution of the severity of loss due to the

occurrence of a postulated event (i.e., Scenario).

3

Risk AnalysisFundamentals of Risk Analysis

Probabilistic Risk Analysis Probabilistic Risk Assessment answers three basic

questions: What and where are the initiators or initiating events? What and how severe are the potential consequences? How likely will these consequences occur (probability or

frequency)?

In a PRA, risk is characterized by two quantities: The magnitude (severity) of possible adverse consequences The likelihood (probability) of occurrence of each

consequence

Probable losses (Billions

Euros)

Value and Fragility of Exposed Assets

Probability earthquake intensity will be exceeded during a particular time period (T = 200 yrs)

Probable losses (millions of Euro)

1 5 10

Intensities

x =

4

Risk AnalysisFundamentals of Risk Analysis

Uncertainty Estimating risk is fraught with lots of uncertainty. Dealing with uncertainty is the essence of risk analysis.. Uncertainty is the state of having limited knowledge. In probabilistic risk analysis, we can account for

uncertainty. Uncertainties are inherent (for example) in:

Hazard(spatial, temporal,

dimensional)

Susceptibility(physical, social,economic, etc.)

Exposure Database(acquisition,

transformationrepresentation, change)

Benefits of risk reduction measures

5

Risk AnalysisFundamentals of Risk Analysis

Return Period Return period also known as a recurrence interval is an

estimate of the interval of time between events. An event with a 100-year recurrence interval will on

average only occur once every 100 years.

Return Period, in years (RP)

Probability of occurrence in any

given year

Annual Probability of Exceedance (EP)

Probability of Exceedance in 50

years

500 1 in 500 0.2% 10%

200 1 in 200 0.5% 25%

100 1 in 100 1% 50%

50 1 in 50 2% 100%

10 1 in 10 10% 500%

RP = 1

EP

Return period (RP) is the inverse of the probability that the event will be exceeded in any one year (Exceedance Probability, EP).

6

Risk AnalysisFundamentals of Risk Analysis

Exceedance Probability Curve The key relationship in managing risk is the exceedance

probability (loss frequency) curve, which represents the relationship between frequency (Exceedence Probability) and severity (amount of losses).

Area under curve = Average Annual Losses (AAL)

Loss Amount ($US Million)

0

2

4

6

10

8

50 100 150 200 250 3000

Annual Pro

bab

ility

of

Exce

edance

(%

)

100 year loss (1% EP) = $US 125 million

AAL = probability that event occurs * loss associated with event

rare events, apply with caution!

7

Risk AnalysisFundamentals of Risk Analysis

Multiple Risk Mapping - AAL Average Annual Loss (AAL) presents a rational way to integrate

risk associated with various hazards.

An AAL value is calculated in each cell for any desired factor (e.g., Loss of housing units, economic loss, casualty, etc.).

Cell

Hazard

Earthquake (AAL) Flood (AAL) Earthquake & Flood (AAL)

Housing Units

Economic Loss (1000$)

Casualties

Housing

Economic Loss (1000$)

Casualties Housing Units

Economic Loss (1000$)

Casualties

1 10 150 5 5 90 3 15 240 8

2 15 300 14 25 50 15 40 350 29

3 30 130 20 5 70 6 35 200 26

4 1 20 5 10 20 8 11 40 13

5 0 35 0 27 14 15 27 49 15

6 5 12 2 4 10 2 9 22 4

7 8 50 1 7 35 1 15 85 2

Total 69 697 47 83 289 50 152 986 97

8

Risk AnalysisFundamentals of Risk Analysis

Risk Matrix Analysis Risk Matrix presents a visual two-dimensional display of the

“ranking” of the risk for a region: frequency and severity scale that is relevant to the region of interest . The scale will help in interpreting historical experience and translating

expert opinion in a consistent manner.

It is a simple approach for setting priorities.

Severity (Loss)

Frequency

Earthquakes

Draughts

Technological

Floods

Forest Fires

Epidemics

LowVery Low

Medium High Very High

Very HighHigh

Medium

Low

Very Low

Very Low 0.001 100000 0.01 1/10000 Very Low 0.002 500Low 0.01 10000 0.1 1/1000 Low 0.005 200Moderate 0.02 5000 0.5 1/200 Moderate 0.02 50High 0.1 1000 2 1/50 High 0.1 10Very High 1 100 >20 >1/5 Very High 1 1

Very Low 0.001 100000 0.01 1/10000 Very Low 0.002 500Low 0.01 10000 0.1 1/1000 Low 0.005 200Moderate 0.02 5000 0.5 1/200 Moderate 0.02 50High 0.1 1000 2 1/50 High 0.1 10Very High 1 100 >20 >1/5 Very High 1 1

SeverityIndex Percent Rate Percent Rate

Casualty Damage

Very Low 0.001 100000 0.01 1/10000 Very Low 0.002 500Low 0.01 10000 0.1 1/1000 Low 0.005 200Moderate 0.02 5000 0.5 1/200 Moderate 0.02 50High 0.1 1000 2 1/50 High 0.1 10Very High 1 100 >20 >1/5 Very High 1 1

Very Low 0.001 100000 0.01 1/10000 Very Low 0.002 500Low 0.01 10000 0.1 1/1000 Low 0.005 200Moderate 0.02 5000 0.5 1/200 Moderate 0.02 50High 0.1 1000 2 1/50 High 0.1 10Very High 1 100 >20 >1/5 Very High 1 1

FrequencyIndex

ExceedanceProbability

ReturnPeriod

9

Risk AnalysisFundamentals of Risk Analysis

Scenario Analysis

A deterministic risk analysis or a scenario analysis is the process of analyzing the consequences - damages, losses or impacts - from a single postulated hazard event, e.g. a scenario.

Choice between a probabilistic risk analysis and scenario analysis depends on the aims of the study.

Scenarios Analysis (scenarios such as the worst case scenario) can be used in establishing a disaster risk management plan.

Scenario events are not meant predict the next event.

Different scenarios should be “simulated” to develop a comprehensive understanding of the potential impacts.

10

Risk AnalysisFundamentals of Risk Analysis

Loss Estimation Models

1. POTENTIAL HAZARDS

1. POTENTIAL HAZARDS

2. INVENTORY DATA

2. INVENTORY DATA

3. DIRECT DAMAGE3. DIRECT DAMAGE

4. INDUCED DAMAGE

4. INDUCED DAMAGE

5. SOCIAL LOSSES

5. SOCIAL LOSSES

6. ECONOMIC LOSSES

6. ECONOMIC LOSSES

7. INDIRECT LOSSES

7. INDIRECT LOSSES

Loss estimation software packages can be used to identify the risk profiles and risk parameters of a region under the simulated events and display them in maps.

11

Risk AnalysisFundamentals of Risk Analysis

Cost-Benefit Analysis

Cost-Benefit analysis (CBA) is a systematic procedure for evaluating decisions that have an impact on society.

CBA provides comparison between the upfront investment costs of mitigation and the benefits of mitigation.

CBA uses results of risk analysis to ensure effectiveness of protective measures by: Balancing the various interests of the stakeholders, Considering the reasonability (or utility) of measures, and Enabling consensus on strategies and measures to reduce

risks

Clarify objectives At outset, check objectives of conducting a CBA. Combination of scoping exercises, shared learning dialogues

and more qualitative.12

Risk AnalysisFundamentals of Risk Analysis

Cost-Benefit Analysis MethodologyCost-Benefit Analysis in the context of DRM requires:

Assessment of risk, and Assessment of avoided risks.

VulnerabilityExposureFragilityCapacities

Source: Mechler, Reihnard

HazardIntensityRecurrence

Risk Analysis:potential impacts

without risk management

Analysis of riskreduction:

potential impacts withrisk management

13

Net benefitsReduction of the potential

impactsless

Cost of risk reduction

Risk AnalysisFundamentals of Risk Analysis

Participative Risk Analysis A Participatory Risk Analysis is carried

out with the participation of an affected target groups in cooperation with the experts and decision makers.

“Participatory Appraisal” sociological approach of rapid, action-oriented assessment of local knowledge, needs, and potentials. Source: GTZ,

Reconstruction after Hurricane Stan

PRA can be used in: development of disaster emergency plans, arrangement and introduction of early warning systems for

flooding implementation of disaster prevention exercises, development of prevention-based planning methods, in which

risk analysis is part of the planning process.

14

Risk AnalysisFundamentals of Risk Analysis

Summary Probabilistic concepts

Uncertainty, Return Period, Exceedance Probability, Loss-Frequency Curve, AAL.

Probabilistic Risk Analysis: All potential impacts corresponding to a specific return period is

assessed.

Scenario (or Deterministic) Analysis/Loss Estimation Models Impact assessed for a postulated event over a defined spatial area.

Risk Indexing/Mapping Key indicators of risk are aggregated in order to set priorities.

Risk Matrix Analysis: Visual two-dimensional display of the “ranking” of the risk.

Cost Benefit Analysis Upfront investment costs of mitigation vs. the benefits of mitigation.

Participative Risk Analysis15