Using Bayesian Networks to Model Expected and Unexpected Operational Losses

This report describes the use of Bayesian networks (BNs) to model statistical loss distributions in financial operational risk scenarios. Its focus is on modeling "long" tail, or unexpected, loss events using mixtures of appropriate loss frequency and severity distributions where these mixtures are conditioned on causal variables that model the capability or effectiveness of the underlying controls process. The use of causal modeling is discussed from the perspective of exploiting local expertise about process reliability and formally connecting this knowledge to actual or hypothetical statistical phenomena resulting from the process. This brings the benefit of supplementing sparse data with expert judgment and transforming qualitative knowledge about the process into quantitative predictions. We conclude that BNs can help combine qualitative data from experts and quantitative data from historical loss databases in a principled way and as such they go some way in meeting the requirements of the draft Basel II Accord (Basel, 2004) for an advanced measurement approach (AMA).     

Some Limitations of Qualitative Risk Rating Systems

Qualitative systems for rating animal antimicrobial risks using ordered categorical labels such as “high,”“medium,” and “low” can potentially simplify risk assessment input requirements used to inform risk management decisions. But do they improve decisions? This article compares the results of qualitative and quantitative risk assessment systems and establishes some theoretical limitations on the extent to which they are compatible. In general, qualitative risk rating systems satisfying conditions found in real‐world rating systems and guidance documents and proposed as reasonable make two types of errors: (1) Reversed rankings, i.e., assigning higher qualitative risk ratings to situations that have lower quantitative risks; and (2) Uninformative ratings, e.g., frequently assigning the most severe qualitative risk label (such as “high”) to situations with arbitrarily small quantitative risks and assigning the same ratings to risks that differ by many orders of magnitude. Therefore, despite their appealing consensus‐building properties, flexibility, and appearance of thoughtful process in input requirements, qualitative rating systems as currently proposed often do not provide sufficient information to discriminate accurately between quantitatively small and quantitatively large risks. The value of information (VOI) that they provide for improving risk management decisions can be zero if most risks are small but a few are large, since qualitative ratings may then be unable to confidently distinguish the large risks from the small. These limitations suggest that it is important to continue to develop and apply practical quantitative risk assessment methods, since qualitative ones are often unreliable.     

Stakeholders’ Perspective on Ecological Modeling in Environmental Risk Assessment of Pesticides: Challenges and Opportunities

The article closely examines the role of mechanistic effect models (e.g., population models) in the European environmental risk assessment (ERA) of pesticides. We studied perspectives of three stakeholder groups on population modeling in ERA of pesticides. Forty‐three in‐depth, semi‐structured interviews were conducted with stakeholders from regulatory authorities, industry, and academia all over Europe. The key informant approach was employed in recruiting our participants. They were first identified as key stakeholders in the field and then sampled by means of a purposive sampling, where each stakeholder identified as important by others was interviewed and asked to suggest another potential participant for our study. Our results show that participants, although having different institutional backgrounds often presented similar perspectives and concerns about modeling. Analysis of repeating ideas and keywords revealed that all stakeholders had very high and often contradicting expectations from models. Still, all three groups expected effect models to become integrated in future ERA of pesticides. Main hopes associated with effect models were to reduce the amount of expensive and complex testing and field monitoring, both at the product development stage, and as an aid to develop mitigation measures. Our analysis suggests that, although the needs of stakeholders often overlapped, subtle differences and lack of trust hinder the process of introducing mechanistic effect models into ERA.     

Communicating Low‐Probability High‐Consequence Risk,Uncertainty and Expert Confidence: Induced Seismicity of Deep Geothermal Energy and Shale Gas

Subsurface energy activities entail the risk of induced seismicity including low‐probability high‐consequence (LPHC) events. For designing respective risk communication, the scientific literature lacks empirical evidence of how the public reacts to different written risk communication formats about such LPHC events and to related uncertainty or expert confidence. This study presents findings from an online experiment (N = 590) that empirically tested the public's responses to risk communication about induced seismicity and to different technology frames, namely deep geothermal energy (DGE) and shale gas (between‐subject design). Three incrementally different formats of written risk communication were tested: (i) qualitative, (ii) qualitative and quantitative, and (iii) qualitative and quantitative with risk comparison. Respondents found the latter two the easiest to understand, the most exact, and liked them the most. Adding uncertainty and expert confidence statements made the risk communication less clear, less easy to understand and increased concern. Above all, the technology for which risks are communicated and its acceptance mattered strongly: respondents in the shale gas condition found the identical risk communication less trustworthy and more concerning than in the DGE conditions. They also liked the risk communication overall less. For practitioners in DGE or shale gas projects, the study shows that the public would appreciate efforts in describing LPHC risks with numbers and optionally risk comparisons. However, there seems to be a trade‐off between aiming for transparency by disclosing uncertainty and limited expert confidence, and thereby decreasing clarity and increasing concern in the view of the public.     

The Essential Elements of a Risk Governance Framework for Current and Future Nanotechnologies

Societies worldwide are investing considerable resources into the safe development and use of nanomaterials. Although each of these protective efforts is crucial for governing the risks of nanomaterials, they are insufficient in isolation. What is missing is a more integrative governance approach that goes beyond legislation. Development of this approach must be evidence based and involve key stakeholders to ensure acceptance by end users. The challenge is to develop a framework that coordinates the variety of actors involved in nanotechnology and civil society to facilitate consideration of the complex issues that occur in this rapidly evolving research and development area. Here, we propose three sets of essential elements required to generate an effective risk governance framework for nanomaterials. (1) Advanced tools to facilitate risk‐based decision making, including an assessment of the needs of users regarding risk assessment, mitigation, and transfer. (2) An integrated model of predicted human behavior and decision making concerning nanomaterial risks. (3) Legal and other (nano‐specific and general) regulatory requirements to ensure compliance and to stimulate proactive approaches to safety. The implementation of such an approach should facilitate and motivate good practice for the various stakeholders to allow the safe and sustainable future development of nanotechnology.     

Agency Problems and Airport Security: Quantitative and Qualitative Evidence on the Impact of Security Training

We analyze the issue of agency costs in aviation security by combining results from a quantitative economic model with a qualitative study based on semi‐structured interviews. Our model extends previous principal‐agent models by combining the traditional fixed and varying monetary responses to physical and cognitive effort with nonmonetary welfare and potentially transferable value of employees' own human capital. To provide empirical evidence for the tradeoffs identified in the quantitative model, we have undertaken an extensive interview process with regulators, airport managers, security personnel, and those tasked with training security personnel from an airport operating in a relatively high‐risk state, Turkey. Our results indicate that the effectiveness of additional training depends on the mix of “transferable skills” and “emotional” buy‐in of the security agents. Principals need to identify on which side of a critical tipping point their agents are to ensure that additional training, with attached expectations of the burden of work, aligns the incentives of employees with the principals' own objectives.     

A Decision Framework for Managing Risk to Airports from Terrorist Attack

This article presents an asset‐level security risk management framework to assist stakeholders of critical assets with allocating limited budgets for enhancing their safety and security against terrorist attack. The proposed framework models the security system of an asset, considers various threat scenarios, and models the sequential decision framework of attackers during the attack. Its novel contributions are the introduction of the notion of partial neutralization of attackers by defenders, estimation of total loss from successful, partially successful, and unsuccessful actions of attackers at various stages of an attack, and inclusion of the effects of these losses on the choices made by terrorists at various stages of the attack. The application of the proposed method is demonstrated in an example dealing with security risk management of a U.S. commercial airport, in which a set of plausible threat scenarios and risk mitigation options are considered. It is found that a combination of providing blast‐resistant cargo containers and a video surveillance system on the airport perimeter fence is the best option based on minimum expected life‐cycle cost considering a 10‐year service period.     

Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location‐Specific Premiums in the Netherlands

As flood risks grow worldwide, a well‐designed insurance program engaging various stakeholders becomes a vital instrument in flood risk management. The main challenge concerns the applicability of standard approaches for calculating insurance premiums of rare catastrophic losses. This article focuses on the design of a flood‐loss‐sharing program involving private insurance based on location‐specific exposures. The analysis is guided by a developed integrated catastrophe risk management (ICRM) model consisting of a GIS‐based flood model and a stochastic optimization procedure with respect to location‐specific risk exposures. To achieve the stability and robustness of the program towards floods with various recurrences, the ICRM uses stochastic optimization procedure, which relies on quantile‐related risk functions of a systemic insolvency involving overpayments and underpayments of the stakeholders. Two alternative ways of calculating insurance premiums are compared: the robust derived with the ICRM and the traditional average annual loss approach. The applicability of the proposed model is illustrated in a case study of a Rotterdam area outside the main flood protection system in the Netherlands. Our numerical experiments demonstrate essential advantages of the robust premiums, namely, that they: (1) guarantee the program's solvency under all relevant flood scenarios rather than one average event; (2) establish a tradeoff between the security of the program and the welfare of locations; and (3) decrease the need for other risk transfer and risk reduction measures.     

How Solid Is the Dutch (and the British) National Risk Assessment? Overview and Decision‐Theoretic Evaluation

Internationally, national risk assessment (NRA) is rapidly gaining government sympathy as a science‐based approach toward prioritizing the management of national hazards and threats, with the Netherlands and the United Kingdom in leading positions since 2007. NRAs are proliferating in Europe; they are also conducted in Australia, Canada, New Zealand, and the United States, while regional RAs now exist for over 100 Dutch or British provinces or counties. Focused on the Dutch NRA (DNRA) and supported by specific examples, summaries and evaluations are given of its (1) scenario development, (2) impact assessment, (3) likelihood estimation, (4) risk diagram, and (5) capability analysis. Despite the DNRA's thorough elaboration, apparent weaknesses are lack of stakeholder involvement, possibility of false‐positive risk scenarios, rigid multicriteria impact evaluation, hybrid methods for likelihood estimation, half‐hearted use of a “probability × effect” definition of risk, forced comparison of divergent risk scenarios, and unclear decision rules for risk acceptance and safety enhancement. Such weaknesses are not unique for the DNRA. In line with a somewhat reserved encouragement by the OECD (Studies in Risk Management. Innovation in Country Risk Management. Paris: OECD, 2009), the scientific solidity of NRA results so far is questioned, and several improvements are suggested. One critical point is that expert‐driven NRAs may preempt political judgments and decisions by national security authorities. External review and validation of major NRA components is recommended for strengthening overall results as a reliable basis for national and/or regional safety policies. Meanwhile, a broader, more transactional concept of risk may lead to better national and regional risk assessments.     

Risk Perception Among Smokers: A Qualitative Study

The aim of this qualitative study is to identify the dimensions people used to assess the risk of smoking and then compare them with those used by health professionals in primary healthcare. Five discussion groups were conducted. The field work was carried out in Barcelona (Spain), from February 2005 to January 2006. Data were analyzed following a semantic‐thematic categorical content analysis (ACC‐ts). Results showed that people tend to employ stereotypical discourses when evaluating the risk of smoking. Similarly, they reassess the risk in the context of their life experience and incorporate new nuances to the arguments sustaining their behavior. Once this reassessment takes place, the decision to continue smoking emerges, and smokers come up with additional arguments justifying their habit (i.e., age, benefits related to costs). Professionals are aware of this process and its multidimensional nature. Nevertheless, their discourse loses this multidimensional feature when discussing the strategies they use at smoking cessation interventions. This qualitative study increases the understanding of various meanings that people attribute to their life experience. These assumptions may be useful for developing health practices that are closer to people. As a practical utility of these results, it would be interesting to apply a preliminary assessment of the different meanings that people attribute to smoking from their life context in risk communication.     

Risk filtering, ranking, and management framework using hierarchical holographic modeling.

This paper contributes a methodological framework to identify, prioritize, assess, and manage risk scenarios of a large-scale system. Qualitative screening of scenarios and classes of scenarios is appropriate initially, while quantitative assessments may be applied once the set of all scenarios (hundreds) has been prioritized in several phases. The eight-phase methodology is described in detail and is applied to operations other than war. The eight phases are as follows: Phase I, Scenario Identification-A hierarchical holographic model (HHM) is developed to describe the system's "as planned" or "success" scenario. Phase II, Scenario Filtering-The risk scenarios identified in Phase I are filtered according to the responsibilities and interests of the current system user. Phase III, Bi-Criteria Filtering and Ranking. Phase IV, Multi-Criteria Evaluation. Phase V, Quantitative Ranking-We continue to filter and rank scenarios based on quantitative and qualitative matrix scales of likelihood and consequence; and ordinal response to system resiliency, robustness, redundancy. Phase VI, Risk Management is performed, involving identification of management options for dealing with the filtered scenarios, and estimating the cost, performance benefits, and risk reduction of each. Phase VII, Safeguarding Against Missing Critical Items--We examine the performance of the options selected in Phase VI against the scenarios previously filtered out during Phases II to V. Phase VIII, Operational Feedback-We use the experience and information gained during application to refine the scenario filtering and decision processes in earlier phases. These eight phases reflect a philosophical approach rather than a mechanical methodology. In this philosophy, the filtering and ranking of discrete scenarios is viewed as a precursor to, rather than a substitute for, consideration of the totality of all risk scenarios.     

The Weakest Link: Demonstrating the Inconsistency of "Appropriate Levels of Protection" in Australia-Salmon

In Australia-Salmon, the WTO Appellate Body found Australia to be in violation of the WTO SPS Agreement based on the inconsistency of the "appropriate level of protection" underlying various SPS measures. Article 5.5 of the SPS Agreement prohibits arbitrary or unjustifiable distinctions in "appropriate levels of protection" if such distinctions result in discrimination or a disguised restriction on international trade. In Australia-Salmon, Canada challenged Australia's import ban on salmon. Australia permitted the entry of other fish products that were known to host some of the same diseases cited by Australia in justifying its salmon import ban. The distinction in the "appropriate levels of protection" between Australia's regulation of salmon and its treatment of these other fish products was found to be "arbitrary or unjustified" and to have "resulted in a restriction on international trade."Australia-Salmon was the first WTO decision to find an Article 5.5 violation. Canada successfully made a "weakest link" argument to undercut Australia's regulatory justification. The decision rests on the relationship between the risk purportedly justifying the salmon import ban and the risk seemingly ignored in Australia's treatment of other fish products-the regulatory "situations" compared concerned the identical pathogens with the identical potential consequences. As such, Australia-Salmon may be an example of a category of regulatory "chains" that are peculiarly exposed to Article 5.5 challenge. In responding to the Appellate Body's ruling, Australia reduced its limits on salmon and imposed new restrictions on the other fish products. The outcome suggests that a challenge of one SPS measure under Article 5.5 may lead to the imposition of new restrictions on other imported products-an unexpected result for the free trade regime.     

The Precautionary Principle and/or Risk Assessment in World Trade Organization Decisions: A Possible Role for Risk Perception

Risk analysis has been recognized and validated in World Trade Organization (WTO) decision processes. In recent years the precautionary principle has been proposed as an additional or alternative approach to standard risk assessment. The precautionary principle has also been advocated by some who see it as part of postmodern democracy in which more power is given to the public on health and safety matters relative to the judgments of technocrats. A more cynical view is that the precautionary principle is particularly championed by the European Community as a means to erect trade barriers. The WTO ruling against the European Community's trade barrier against beef from hormone-treated cattle seemed to support the use of risk assessment and appeared to reject the argument that the precautionary principle was a legitimate basis for trade barriers. However, a more recent WTO decision on asbestos contains language suggesting that the precautionary principle, in the form of taking into account public perception, may be acceptable as a basis for a trade barrier. This decision, if followed in future WTO trade disputes, such as for genetically modified foods, raises many issues central to the field of risk analysis. It is too early to tell whether the precautionary principle will become accepted in WTO decisions, either as a supplement or a substitute for standard risk assessment. But it would undermine the value of the precautionary principle if this principle were misused to justify unwarranted trade barriers.     

A Risk Assessment Framework for Assessing Metallic Nanomaterials of Environmental Concern: Aquatic Exposure and Behavior

Nanomaterials are finding application in many different environmentally relevant products and processes due to enhanced catalytic, antimicrobial, and oxidative properties of materials at this scale. As the market share of nano‐functionalized products increases, so too does the potential for environmental exposure and contamination. This study presents some exposure ranking methods that consider potential metallic nanomaterial surface water exposure and fate, due to nano‐functionalized products, through a number of exposure pathways. These methods take into account the limited and disparate data currently available for metallic nanomaterials and apply variability and uncertainty principles, together with qualitative risk assessment principles, to develop a scientific ranking. Three exposure scenarios with three different nanomaterials were considered to demonstrate these assessment methods: photo‐catalytic exterior paint (nano‐scale TiO₂), antimicrobial food packaging (nano‐scale Ag), and particulate‐reducing diesel fuel additives (nano‐scale CeO₂). Data and hypotheses from literature relating to metallic nanomaterial aquatic behavior (including the behavior of materials that may relate to nanomaterials in aquatic environments, e.g., metals, pesticides, surfactants) were used together with commercial nanomaterial characteristics and Irish natural aquatic environment characteristics to rank the potential concentrations, transport, and persistence behaviors within subjective categories. These methods, and the applied scenarios, reveal where data critical to estimating exposure and risk are lacking. As research into the behavior of metallic nanomaterials in different environments emerges, the influence of material and environmental characteristics on nanomaterial behavior within these exposure‐ and risk‐ranking methods may be redefined on a quantitative basis.     

Integrating Stakeholder Mapping and Risk Scenarios to Improve Resilience of Cyber‐Physical‐Social Networks

The future of energy mobility involves networks of users, operators, organizations, vehicles, charging stations, communications, materials, transportation corridors, points of service, and so on. The integration of smart grids with plug‐in electric vehicle technologies has societal and commercial advantages that include improving grid stability, minimizing dependence on nonrenewable fuels, reducing vehicle emissions, and reducing the cost of electric vehicle ownership. However, ineffective or delayed participation of particular groups of stakeholders could disrupt industry plans and delay the desired outcomes. This article develops a framework to address enterprise resilience for two modes of disruptions—the first being the influence of scenarios on priorities and the second being the influence of multiple groups of stakeholders on priorities. The innovation of this study is to obtain the advantages of integrating two recent approaches: scenario‐based preferences modeling and stakeholder mapping. Public agencies, grid operators, plug‐in electric vehicle owners, and vehicle manufacturers are the four groups of stakeholders that are considered in this framework, along with the influence of four scenarios on priorities.     

A Multifactorial Risk Prioritization Framework for Foodborne Pathogens

We develop a prioritization framework for foodborne risks that considers public health impact as well as three other factors (market impact, consumer risk acceptance and perception, and social sensitivity). Canadian case studies are presented for six pathogen‐food combinations: Campylobacter spp. in chicken; Salmonella spp. in chicken and spinach; Escherichia coli O157 in spinach and beef; and Listeria monocytogenes in ready‐to‐eat meats. Public health impact is measured by disability‐adjusted life years and the cost of illness. Market impact is quantified by the economic importance of the domestic market. Likert‐type scales are used to capture consumer perception and acceptance of risk and social sensitivity to impacts on vulnerable consumer groups and industries. Risk ranking is facilitated through the development of a knowledge database presented in the format of info cards and the use of multicriteria decision analysis (MCDA) to aggregate the four factors. Three scenarios representing different stakeholders illustrate the use of MCDA to arrive at rankings of pathogen‐food combinations that reflect different criteria weights. The framework provides a flexible instrument to support policymakers in complex risk prioritization decision making when different stakeholder groups are involved and when multiple pathogen‐food combinations are compared.     

A Quantitative Assessment of the Risk for Highly Pathogenic Avian Influenza Introduction into Spain via Legal Trade of Live Poultry

Highly pathogenic avian influenza (HPAI) is considered one of the most important diseases of poultry. During the last 9 years, HPAI epidemics have been reported in Asia, the Americas, Africa, and in 18 countries of the European Union (EU). For that reason, it is possible that the risk for HPAI virus (HPAIV) introduction into Spain may have recently increased. Because of the EU free‐trade policy and because legal trade of live poultry was considered an important route for HPAI spread in certain regions of the world, there are fears that Spain may become HPAIV‐infected as a consequence of the legal introduction of live poultry. However, no quantitative assessment of the risk for HPAIV introduction into Spain or into any other EU member state via the trade of poultry has been published in the peer‐reviewed literature. This article presents the results of the first quantitative assessment of the risk for HPAIV introduction into a free country via legal trade of live poultry, along with estimates of the geographical variation of the risk and of the relative contribution of exporting countries and susceptible poultry species to the risk. The annual mean risk for HPAI introduction into Spain was estimated to be as low as 1.36 × 10⁻³, suggesting that under prevailing conditions, introduction of HPAIV into Spain through the trade of live poultry is unlikely to occur. Moreover, these results support the hypothesis that legal trade of live poultry does not impose a significant risk for the spread of HPAI into EU member states.     

How to Model a Negligible Probability Under the WTO Sanitary and Phytosanitary Agreement?

Since the 1997 EC – Hormones decision, World Trade Organization (WTO) Dispute Settlement Panels have wrestled with the question of what constitutes a negligible risk under the Sanitary and Phytosanitary Agreement. More recently, the 2010 WTO Australia – Apples Panel focused considerable attention on the appropriate quantitative model for a negligible probability in a risk assessment. The 2006 Australian Import Risk Analysis for Apples from New Zealand translated narrative probability statements into quantitative ranges. The uncertainty about a “negligible” probability was characterized as a uniform distribution with a minimum value of zero and a maximum value of 10^?6. The Australia – Apples Panel found that the use of this distribution would tend to overestimate the likelihood of “negligible” events and indicated that a triangular distribution with a most probable value of zero and a maximum value of 10^?6 would correct the bias. The Panel observed that the midpoint of the uniform distribution is 5 × 10^?7 but did not consider that the triangular distribution has an expected value of 3.3 × 10^?7. Therefore, if this triangular distribution is the appropriate correction, the magnitude of the bias found by the Panel appears modest. The Panel's detailed critique of the Australian risk assessment, and the conclusions of the WTO Appellate Body about the materiality of flaws found by the Panel, may have important implications for the standard of review for risk assessments under the WTO SPS Agreement.     

A Multicriteria Decision Analysis Model and Risk Assessment Framework for Carbon Capture and Storage

Multicriteria decision analysis (MCDA) has been applied to various energy problems to incorporate a variety of qualitative and quantitative criteria, usually spanning environmental, social, engineering, and economic fields. MCDA and associated methods such as life‐cycle assessments and cost‐benefit analysis can also include risk analysis to address uncertainties in criteria estimates. One technology now being assessed to help mitigate climate change is carbon capture and storage (CCS). CCS is a new process that captures CO₂ emissions from fossil‐fueled power plants and injects them into geological reservoirs for storage. It presents a unique challenge to decisionmakers (DMs) due to its technical complexity, range of environmental, social, and economic impacts, variety of stakeholders, and long time spans. The authors have developed a risk assessment model using a MCDA approach for CCS decisions such as selecting between CO₂ storage locations and choosing among different mitigation actions for reducing risks. The model includes uncertainty measures for several factors, utility curve representations of all variables, Monte Carlo simulation, and sensitivity analysis. This article uses a CCS scenario example to demonstrate the development and application of the model based on data derived from published articles and publicly available sources. The model allows high‐level DMs to better understand project risks and the tradeoffs inherent in modern, complex energy decisions.     

A Hint of Risk: Tradeoffs Between Quantitative and Qualitative Risk Factors

Risk-perception research plays an active role in discussions of risk-management alternatives. However, little guidance is provided regarding how public concerns should be weighed against other sources of cost and benefits. This paper reports the results of two experiments that measure tradeoffs among cost (in dollars), a quantitative risk measure (number of deaths or injuries), and several qualitative characteristics associated with perceived risk. Most subjects were willing to make the requested trade. However, the perceived risk information led others to reject the proposed technology.