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    Economic downturn crisis forecast November 2008

    Contact us to know details on economic downturn crisis forecast

    graphic results of economic downturn crisis forecast November 2008

    Economic Downturn Magnitude and Duration Quantitative Study by Riskope (http://www.riskope.com), November 2008

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Kuala Lumpur, Malaysia, Course on Rational Risk and Crisis Management

This course is suitable for anyone who is involved in process hazards, risk quantification and preparation of 360 degrees, holistic, ISO 31000 compliant Risk Assessment for business, operations, projects. You can see the brochure and registration information here.

The methodologies introduced in this course will greatly benefit money lenders, insurers in addition to corporate managers, upper management.

You should attend if you:

  • Want to do your best to ensure your business survival by proactively managing risks and crises.

  • Want to ensure healthy coverage (as an insurance, as an insured) and money lending (as a debtor, as a lender).

  • Want to be able to understand how the situation around and inside your company evolve and want to make sure you take advantage of the opportunities that arise.

  • Care about your workers, people, society and understand that it is important to leave a legacy that is better than the one you received.

Capitalize on the expert knowledge to gain maximum value on these vital issues:

  • IDENTIFY the risks that really matter and have the potential to disrupt your business

  • CONVINCE money lenders that your business will be sustainable in a world of shrinking credits

  • DISCOVER the issues that could lead to crises possibly hampering your growth

  • PINPOINT the threat that is lurking in any commercial contract, ready to bite you

  • EXAMINE what can you do if your insurance denies your next coverage

  • ANALYZE how can you best support the next critical decision in a transparent, rational way

  • EVALUATE what you can do by yourself and what should be done by a risk consultant; as well as REALIZE what you can ask from a risk consultant and what he should deliver

  • GENERATE value and proactively defend your business by understanding your business risk and crisis landscape.

Can we stop misrepresenting reality to the public?

We gave a presentation in Toronto, at the CIM 2013 conference.

The main points made are the following:

  • You cannot manage (your) capital if you do not understand risks.
  • You will not be able to make proper decisions if you do not understand risks.
  • You will not be allowed to operate if people do not believe, trust and understand you and your risks.
  • You will miss opportunities and blindly expose yourself to risks  if you do not understand risks.
  • If you understand your risks you can go and see your bankers with better indicators than the sad, obsolete and misleading NPV.
  • With better understanding of risks you can beat insurance denial problems and come up with win-win solutions either with your insurer, or with you key contractual counterparts.
Sadly, the recent collapse of the nine-storey Rana Plaza factory in Dhaka, Bangladesh, one of the worse industrial disaster in the world since the 1984 Bhopal gas explosion, confirms the above.

 

Maths make things simpler, rather than more complicated, bring clarity.

A discussion on LinkedIN entitled “Does anyone use Standard Deviation, Variance or similar measures to prioritise risks” prompted a reply we are now posting on the blog for our interested readers.

It’s a bit technical, but it shows that maths make things simpler, rather than more complicated, bring clarity!

Talking about clarity, let’s remember that the context of most of our work at Riskope is in downside risk, in various industries. When we refer below to “Consequences”, we are referring to the “sum” of many components including, for example: replacement cost, Business interruption, loss of market share, reputation, legal costs, crisis cost (boycotts, protests…), etc.

As many pointed out in the LinkedIN discussion, both probability and consequences are actually stochastic (random) within a population of scenarios (careful not to “sample” different populations with the excuse of simplifying the problem). Both vary between a Min and a Max, with a certain expected value Ave, and a standard deviation St.

Oh, by the way, some may even point out that p,C are not necessarily independent variables, but let’s not go there this time around for the sake of space.

Thus R= p * C holds, with p, C and, as a result, R being stochastic (random) variables. Thus R will have a Min and a Max, Ave and a standard deviation St and it will be possible to evaluate the probability that R is larger than a given value, or what is the value that has a x% probability of exceedance.
More importantly, as we do on a daily basis in ORE applications (Optimum Risk Estimates), we can compare probabilistically the risk to the client’s tolerability threshold (another chapter we will leave aside for obvious space limitations).

To do that all of the above we need to calculate R.
Now, let’s make sure we do not use a bazooka to shoot a mosquito here, with all its unpleasant side effects!

Monte Carlo simulation would work provided we know with good approximation Min, Max, Ave, St of p and C. We believe that in most cases we could all convince ourselves we have a grasp of Min, Max and Ave, but frankly St is a difficult one.
Furthermore, Monte Carlo will require that you define the distribution (type) of p,C…and there we are in uncharted territory.

Information theory says that if we do not know (very well) what type a distribution belongs to, we minimize the errors on the estimates by keeping it simple! Some authors, even go so far as to say that you are better off selecting a UNIFORM (yes, you read well) distribution if you are not sure of the type.

Now, using Monte Carlo to calculate R as a product of two uniform distribution is really using a space ship to go buy your candies at the shop next door.

Below we are showing the super simple, analytic solution for the case where p and C are symmetric distributions (of any type) developing respectively between pMin =CMin =nil and a maximum value pMax, CMax.
Of course the case where pMin = a, CMin= b would also be very easy to derive.

Because both distributions are symmetric their averages are respectively

E(p)= pMax /2;
E(C)= CMax /2.

Risk R= p*C, so Ave (R), is immediately found as follows:

Ave(R) = Ave(p) * Ave(C)= (pMax * CMax)/4;

It can be seen that the average risk is four times smaller than the maximum risk, for any shape of symmetric distributions going from nil to Max.

A slightly more complicated direct formula leads to St(R).
Job done!

Now we can calculate any probability of exceedence you’d like by creating an empirical distribution of R with Min(R), Max(R), Ave(R), St(R).

Why would one use Monte Carlo and make the collateral damage of increasing the errors?

If this type of maths intimidates you, there is another approach we often use at Riskope: we consider several sub-cases of a scenario with point estimates of p-C and we “lump them up” in a “risk bubble”. We have a number of slideshows you can access from our blog that display such “risk-bubbles”.

Furthermore, if you really believe you have a grasp on the dissimetry of the p,C distribution, then you could use other direct approximations as well, still leaving the Monte Carlo bazooka to rest.

ISO 31000 IEC, ISO 31010 and Tolerability, Risk Ranking, Crisis and Reputational Impacts

If properly understood and managed, even an unexploded bomb can become an instrument for social gathering and community safety.

If properly understood and managed, even an unexploded bomb can become an instrument for social gathering and community safety.

Back in 1999, in a course we were giving on a regular basis at UBC (Continuing Education, University of British Columbia), entitled “Design of Risk Management Systems”, then in the book entitled Improving Sustainability through Reasonable Risk and Crisis Management ( A guide to Making Better Decisions ISBN 978-0-9784462-0-8we were promoting a strong linkage between Risk Management and Crisis Management as well as the need for robust, science based, risk ranking methodologies.

We spoused the principles that constitute ISO 31000 before it was written, like many serious Risk Management professionals, I am quite sure, and started reading IEC/ISO 31010 with lots of expectations.

IEC/ISO 31010 covers lots of ground indeed, including lists of available tools to identify hazards (in various contexts), determine probabilities (and their approximate distributions, if need be) and consequences of hazards. For each tool (like Monte Carlo simulation or Bayesian estimates, etc…) IEC/ISO 31010 defines applicability. Many welcomed this thorough international “house-keeping” effort, although some criticisms have been formulated, sometimes arising from very specific fields, that will most likely be covered in future editions.

From our perspective IEC/ISO 31010 has however some “shadow areas” that should be discussed:

1) Risk “tolerability/acceptability” is used, but not defined (not even a method is discussed, although historic published examples exist from various countries). This leaves the door open to major confusion and misrepresentations, inefficiencies and mitigative funds misallocation as pointed out by various authors in the last decade.
2) Risk “Ranking” is mentioned but a proper procedure is not defined. An example? In a top-ten risk list developed using common practice approaches, one will usually find high likelihood/ low consequence and low likelihood/high consequence risks mixed-up.
3) Crisis and Reputational impacts are not even referred to…despite the strong exposures these types of impact can have on the balance sheet of a corporations.
4) Complex consequences metrics needed to cover environmental, long term, etc… risks are not neither developed nor supported.

At Riskope we believe that until a code will stress these points and define proper methodologies (although it may remain a non prescriptive code like ISO 31000) we will be in a situation where a ISO compliant Risk Management approach could lead to confusion and misrepresentations with potential nefarious consequences.

What is your opinion?

L’Aquila earthquake verdict explained from a Risk & Crisis Management point of view.

Data for this summary have been gathered through media and publicly available records. Details we consider “irrelevant” to this discussion have been omitted because of space limitations.

We will start this post by summarizing the tragic tale of L’Aquila, a city featuring many historic public buildings and centuries old residential structures located in Italy, a country where retrofitting of old (privately owned) structures to meet new seismic safety criteria is reportedly not enforced (OPCM 3274/03, art. 2, comma 6).

The area is seismic as witnessed by major earthquakes recorded since the year 1349, then 1452, 1461, 1501, 1646, 1703, 1706, 1958 and 2009. This last quake led to 309 casualties, 1600 wounded (200 very severely), 65,000 evacuated in the city and damages for over 10B€. Numerous studies had been conducted on the seismicity of the area, including long-term predictions made in 1995. It is well known, that predictions in this field are always surrounded by large uncertainties. Other studies had shown that local conditions may have amplified the effects of a quake in the area. A 1999 study on the vulnerability of public, strategic and “special” buildings showed critical vulnerabilities, which were never addressed in many buildings (including, reportedly, all those that ended up collapsing during the last earthquake).

Prior to the tragic event a “swarm” of foreshock earthquakes with almost 100 times the average rate was recorded in and around L’Aquila. The swarm triggered a crisis status due to public’s panic, further fuelled by independent scientists opinions. The swarm had started in December 2008 (M=1.8), then in January with M=3 gradually and continuously evolving with increasing intensity and frequency to the date of the major event.

An official government body called the National Commission for the Forecast and Prevention of Major Risks had six top officers participating in a meeting with the public on 31st March 2009, six days before the nefarious earthquake (Mw=6.3/Richter 5.9), and a day after the latest, and strongest event in the swarm.
Reportedly six commission members and one civil protection officer worked together as a collective unit during the meeting at the request of the head of the Civil Protection Department, G. Bertolaso, to carry out what Bertolaso had called a “media operation,” which meant that the experts spoke directly with the public rather than via the civil protection department. Still the public’s concerns were entirely dismissed and people were told to relax instead of being on guard. As a result some of the town’s residents changed their behaviour of seeking shelter outside, as they were used to doing when tremors happened, staying indoors instead.
The seven were brought to trial for manslaughter in September 2011 for the advice they gave in that meeting.

Our Analysis

L’Aquila was a very vulnerable “portfolio”, exposed to a natural hazard which had occurred in the past, and had a chance of occurring again in the future.
Both the hazard and the vulnerability were well documented. The only unknown was the timing. The discussion whether the 2008-2009 swarm was a beneficial energy release or, as it actually happened, a series of foreshocks leading to a stronger main event is, in the long run, quite irrelevant.

From a prior post on Negligence (see prior post for more detail on Negligence) we know that in some countries tort law uses the somewhat vague standard test of the “reasonable man” to judge liability of negligence. Following the test, an entity may be deemed negligent only if Mitigative moneys spent (per annum) are less than the annualized risks. Clearly transparency and rationality constitute a strong a priori defence in case something would go wrong.

In that post, using two real-life examples, we showed that the legal negligence test is not a critical factor for safety, health and risk and crisis management, but constitutes a bare minimum. The negligence test is not an end, but only the start of a continuous process.

How would the test score for L’Aquila case?

Even if one decided to be madly optimistic and not consider human victims, the wounded etc., but consider only the replacement cost of the public infrastructure (excluding private residences), loss in tax revenues, the cost of rescue and emergency management, the overall cost of the catastrophe could have been very optimistically estimated ahead of the quake at 5B€. Below are the replies of the test (at L’Aquila) for various probabilities of occurrence:
p= 1/100 C (B€)=5 Minimum Mitigative Moneys=50M€/yr
p=1/1000 C (B€)=5 Minimum Mitigative Moneys=5M€/yr

The reason for selecting a probability of 1/100 derives from the nine major recorded events in approximately 700 years. However, even if one would consider, again in an overly optimistic way, a probability ten times lower, thus 1/1000, the Minimum Mitigative Moneys would still be 5M€/yr.

Apparently nothing was done in l’Aquila to mitigate or prepare for the “next big one”. As far as we can read, no one ever performed a negligence test, a proper risk assessment, where not only the hazard, but also the consequences are considered.

Furthermore there was no transparency in the information to the public, to say the least.

What the Judge has ruled

The judge stated that the seven members of the Commissione had analyzed the risk of a major quake in a “superficial, approximate and generic” way and that they were willing participants in a “media operation” to reassure the public. He ruled that this failure led to the deaths of 29 of the 309 people killed in the quake and to the injuries of four others (showing a detailed approach to the causes of death). “The deficient risk analysis was not limited to the omission of a single factor,” he writes, “but to the underestimation of many risk indicators and the correlations between those indicators.” Here we would add that unfortunately the convicted seem to have performed hazard analyses, but not risk analyses, i.e. they did not consider the potential effects of the hazard and what the mitigative options could have been (not only retrofitting, but preparedness, drills, etc.).

The statement above summarizes very well Riskope’s understanding and analysis of the facts available to us.
All the discussions and commotion about the sentence (saying that “science has been killed”, that “the last time a scientist was judged in this way was Galileo”, etc.) are misplaced comments that show the ignorance of their authors of the basic rules of risk analysis. As a matter of fact, Scientific American (David Ropeik, The L’Aquila Verdict: A Judgment Not against Science, but against a Failure of Science Communication) rightly wrote that “this was not a case against science, the Judge recognized the non predictability of such an event already in the indictment, but a judgement against the failure of scientific communication (of risks).”
It is time that geoscientists, seismologists and engineers, who are very capable and respectable hazard specialists, recognize that risk assessments are an area which requires specific knowledge, in which they are not cognisant.
Risk assessments should be prepared by risk specialists and hazard knowledge constitutes at most half of the equation.
Judges have grasped the difference.

Riskope 5 day course on Risk and Crisis Management for top managers and key personnel.

Riskope were recently asked to provide a comprehensive five day course addressing Risk and Crisis Management, Risk Based Decision Making, Project Evaluation for top managers and key personnel at Investment Banks, Oil & Gas, Energy and Transportation.
Although companies willing to commit the resources for a five-day intensive courses remain limited, we felt like it would be a good idea to share the program with our readership, as an example.

A course for decision-makers, key personnel, CxOs in any industry, any country

A course for decision-makers, key personnel, CxOs in any industry, any country

Of course our courses are scalable, from a couple hours up to this exhaustive review and custom tailored courses can be set-up by selectively picking the themes that most interest you/your organization. You can download the example file here.

Contact us today to discuss your custom made in-house Risk and Crisis Management, Risk Based Decision Making, Project Evaluation! Armed with the skills you will learn from Riskope you will have a competitive edge on your competitors, your ideas will be more defensible and sustainable, and your chances of success will multiply.

Insurance Denial not Only for Mining, but also for Residential and Private Parties?

At Riskope we have been writing and discussing insurance denial issues hitting miners around the world since 2009.

Flooded Gas Station

Flooded Gas Station

Now there is evidence that the problem is extending to flood insurance (and most certainly to other natural hazard-linked events in the future).

Seen from a societal risk management point of view the problem is quite intriguing:

1) Governments (at all level, from Central to Municipalities) have allowed residential development of areas that were already, or may become (because of climate change) hazardous (at higher frequency than “calm” areas). Reasons for those decisions vary from demographic pressure (need to find a place for people to settle) to “business like” (more people means more income taxes, more employment, etc.)
2) People have gladly gone into “hazardous” area unknowingly, or because they were affordable.
3) Insurances were happy to insure, as it meant more business. In some cases they established “agreements” with the government, as they were almost replacing a “public service”.

Whatever the reasons and the history, now insurers are finding themselves overexposed, governments cannot offer that “public service” (people in “calm” areas would not agree to “pay for the others”) and people in the hazardous area demand safety, rescue and support.

Three actors, three sets of “historic reasons”, three sets of diverging interests.

Any ideas and comments?

Cree valor en su empresa minera por medio de una integración estratégica de conocimiento y escenarios de riesgos con Estimaciones óptimas de riesgo (ORE)®

La gestión de riesgos mineros solía ser una cuestión de “conformidad” o de “minimización de pérdidas”, algo en lo que se pensaba después, no una herramienta para crear valor en la mineria.

Tanque de relaves en los trópicos. No es muy lindo a ver, ma cuales son los riesgos?

Tanque de relaves en los trópicos. No es muy lindo a ver, ma cuales son los riesgos?

Las mineras interpretaban los resultados de las Evaluaciones de Riesgos con Gráficos de Impacto Probabilístico (pérdidas) confusos (conocidos como PIG), que a menudo eran engañosos y que en realidad no promovían ni incrementaban una comprensión holística del ambiente de negocios y de los tanques de relaves/colas. Cree valor en su minera por medio de una integración estratégica de conocimiento y escenarios de riesgos con Estimaciones óptimas de riesgo (ORE)® . Riskope tiene una preparación académica única y experiencia en investigación y aplicación de evaluación de riesgos a nivel mundial implementando ORE. Las ORE son el resultado de veinte años de experiencia en el mundo entero y han sido desarrolladas para diversos clientes, incluyendo algunos de Fortune 500, en varias etapas, como adquisiciones, pre-factibilidad, operaciones y cambios. Mire la presentación aquí.

Riskope’s Blog 2012 in Review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

600 people reached the top of Mt. Everest in 2012. This blog got about 3,700 views in 2012. If every person who reached the top of Mt. Everest viewed this blog, it would have taken 6 years to get that many views.

Click here to see the complete report.

Japan tunnel disaster flashback

The very recent tragic accident in the Sasago Tunnel in Japan brings memories of our first mission in that country, in the aftermath of the Toyohama Tunnel accident in Furubira Town (Hokkaido, Japan) on February 10, 1996 (Toyohama Tunnel Rockfall).

When there is a probability of having people trapped underground, communication is the start and the end of a Properly done Risk Assessment

When there is a probability of having people trapped underground, like in any other accident, communication is the start and the end of a properly designed crisis plan.

The collapse of Toyohama tunnel crushed cars and a bus, killing 20 people in 1996. The causes of that failure were very different from the present case, but that’s not the point to be discussed here.
At that time, local authorities and emergency crews were heavily criticized by local population, and internationally, for the lack of “people-skills”, public relations, issue management and an apparent lack of empathy. Shortly after, we received an invitation and we were touring Japan lecturing on disaster communication, crisis management, with particular emphasis on the need to communicate with the families of potential victims and the media. That case study constituted the core of a course we gave then, within the frame of continuing education, at UBC, University of British Columbia.

Reportedly the Sasago tunnel is the worst such accident in Japan since 1996 with at least nine victims by the time we publish this post. We are going to follow very closely the development of the Sasago tunnel accident rescues hoping to learn that there are no more victims and the survivors’ families are  treated with compassion, empathy and their needs of information are addressed timely and in respectfully maner.

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