Basic theory The trade-off concept The risk aversion concept Economic theory The cost optimization concept 2013/1/18 2

Transcription

1 Maritime risk assessment- cost benefit assessment Shuen-Tai Ung Department of Merchant Marine National Taiwan Ocean University 2013/1/18 1

2 Basic theory The trade-off concept The risk aversion concept Economic theory The cost optimization concept 2013/1/18 2

3 The trade-off concept CBA in this category is basically a trade off between costs of implementing safety measures and the residual risk level since no matter what measures are taken, some residual risk will remain. Such a trade-off concept often implies that a computation must be made in which the quantum of risk effects is placed on one scale and the sacrifice involved in the measures necessary for averting the risk (whether in money, time or trouble) is placed in the other. 2013/1/18 3

4 Tolerability doctrine Intolerable Region Tolerable or ALARP Region (risk reduction is undertaken only if a benefit is desired) Broadly Acceptable Region (No need for detailed working to demonstrate ALARP) Negligible Risk Risk cannot be justified save in any ordinary circumstances Tl Tolerable if cost of risk ik reduction is grossly disproportionate to the improvements gained Necessary to maintain assurance that risk remains at this level 2013/1/18 4

5 The risk aversion concept Risk aversion is the tendency for people (e.g. managers, consumers, decision-makers i etc.) to avoid undertaking risks and to choose less risky alternatives. 2013/1/18 5

6 Economic theory Costs and benefits may arise at different point in time and because the value of money changes over time due to inflation and time value of money factors, one must be able to calculate the value of all monetary costs and benefits at one specific point of time. 2013/1/18 6

7 Economic theory based on simple FV PV PV 1 FV 1 i i interest rate n n PV: present monetary value FV: the value of P after n years or periods i: rate of interest per year/period (corrected for inflation) n: number of years or periods 2013/1/18 7

8 Economic theory based on simple interest rate If a chain of n equal future amounts FV are incurred at regular intervals (e.g. inspect costs, maintenance costs, loan payments, etc.), the present value PV of this chain of future amounts FV is as follows: n PV FV 1 j1 i j PV: present monetary value FV: the value of P after n years or periods i: rate of interest per year/period (corrected for inflation) n: number of years or periods 2013/1/18 8

9 Cost involved in implementing safety measures Costs related to the design and development of safety measures Costs of equipment and installation Costs related to the inspection and maintenance of safety equipment in all its life Staff operating costs Training costs Enforcement costs Inspection and auditing costs Administration costs etc. 2013/1/18 9

10 Reduced costs involved in implementing safety measures Total loss of ship Degraded d operation resulting li in unscheduled hdlddl delays Loss of future income due to atotal loss or ineffective operation Repair costs Fines and penalties Compensation to third parties Negative publicity etc. 2013/1/18 10

11 Concept of cost-optimal optimal safety level l Co ost Total costs: C P + C L Preventive costs: C P Cost-optimal safety level Cost of losses: C L Safety 2013/1/18 11

12 Cost optimization-case i study A bridge designer is to establish the optimal energy capacity of a bridge design that is exposed to ship traffic. The energy capacity denotes the energy that the bridge can absorb without collapsing. Increasing the energy capacity of the bridge requires the implementation of protective measures that come at a considerable cost. Table on the next slide shows the information about the different bridge design alternatives. 2013/1/18 12

13 Cost optimization-case i study Bridge energy capacity (MJ) Concept Return period for exceedence T Annual rate of exceedence (1/T) (years) C c (USD) *10 6 Concept *10 6 Concept * c 2013/1/18 13

14 Cost optimization-case study assumptions A loss of USD 2*10 8 in the event of catastrophic collapse is estimated. The real interest rate i is assumed to be 3% per year. It is also assumed that a cost of loss C f will occur at a definite time with continuous compounding interest rate. In addition, the collapse follow an exponential distribution. ib ti 2013/1/18 14

15 Cost optimization-case i study C pv C f e it C pv is the present value of the future loss C f is the future loss in present monetary units (not inflated) i is the real interest rate excluding inflation t is the time to the future loss 2013/1/18 15

16 Cost optimization-case i study When the time to occurrence of the loss is a random variable, C pv can be expressed as follows: C pv C f t 0 e it f dt t f(t) is the probability density function for the time t (i.e. the time to occurrence of catastrophic collapse) and f t e t is the annual rate of exceedence of bridge energy capacity 2013/1/18 16

17 Cost optimization-case i study C t C e it pv f 0 t C e i t f 0 C i f e e t dt i t t 0 dt 2013/1/18 17

18 Cost optimization-case i study If t is 500, 1000 or 5000, then C C e i i f pv 0 C i t t f Having known C pv, the optimum ttl total cost can be obtained as follows: C T C pv C c C T is the optimum total cost C c denotes the cost of protective safety measures 2013/1/18 18

19 Cost optimization-case i study Bridge energy capacity (MJ) Return period for exceedence T (years) Annual rate of exceedence (1/T) C c (USD) C pv (USD) C T (USD) Concept * * *10 6 Concept * * *10 6 Concept * * * /1/18 19

20 CBA in the risk assessment context t Identify safety measures Calculate costs Calculate costs based on the cost-effective principle Cl Calculate lt benefits Cl Calculate lt CB ratios Sensitivity analysis Decision ii making 2013/1/18 20

21 Cost-benefit ratio practice The cost of the existing risk for large spills can be calculated as follows: 4 C R C P S R The cost of the risk after the implementation of the safety measure is calculated as follows: C R 1 C P S The benefit of the risk reduction is as follows: C C R C R /1/18 21

22 Cost-benefit ratio practice The present vale of the benefit for the 12-year lifetime is calculated as follows: PV B n FV n12 j 1 i j 1 j 1 The present vale of the cost for the 12-year lifetime is calculated as follows: PV C n12 j j /1/18 22 j

23 Cost-benefit ratio practice The cost-benefit ratio is therefore calculated as follows: PV C CB ratio PV B Since the cost-benefit ratio is greater than 1.0, the new safety measure proposed is not suggested to implemented. 2013/1/18 23

24 Cost per Unit Risk Reduction (CURR) approach The Cost per Unit Risk Reduction (CURR) approach values all the cost and benefit items, except from the economic benefits of reduced fatalities, in monetary terms. It considers the number of reduced equivalent lives lost over the lifetime i of the measure, assuming an equivalence between minor injuries, major injuries and dd death h( (e.g. 100 minor injuries i accounts for 10 major injuries, which accounts for one death). 2013/1/18 24

25 Cost per Unit Risk Reduction CURR NPV REF (CURR) approach REF: the estimated nmberof number reduced equivalent fatalities 2013/1/18 25

26 Cost per Unit Risk Reduction (CURR) approach n t B t Ct 1 r NPV 1 t0 NPV: net present value C t : the sum of costs in period t B t : the sum of benefits in period t r:theh discount rate per period t: measure e of time horizon o for the assessment, e starting in period 0 and finishing in period n. 2013/1/18 26

27 RCOs determined for generic fishing RCOs Cost/year vessels Benefit /year Risk reduction (no. of deaths /injuries) CURR RCO RCO RCO RCO /1/18 27

28 Implied Cost of Averting a Fatality NC ICAF RCO RFR (ICAF) approach NC: net annualal cost of measure RFR: reduction in annual fatality rate 2013/1/18 28

29 Implied Cost of Averting a Fatality (ICAF) approach The ICAF can be interpreted as the economic benefits of averting a fatality. A decision criterion must be established for this value in order to evaluate whether h a given risk control option is cost-effective or not and this criterion would in away involve pricing i a human life. DNV has, e.g. indicated that risk control options with an ICAF of less than USD 3 million generally should be considered as cost-effective and therefore implemented. 2013/1/18 29

30 Criterion i for the ICAF approach ICAF g e 1W 4 W g: the Gross Domestic Product per person e: life expectancy at birth W: the proportion of life spent in economic activities 2013/1/18 30

31 GDP, life expectancy and ICAF in /1/18 31

32 GDP, life expectancy and ICAF in /1/18 32

33 Average ICAF for periods and /1/18 33

34 Working time fraction and the resulting ICAF 2013/1/18 34

35 Alternatives- the ranking index approach Platform 1 Platform 2 Platform 3 Costs 5*10 6 (2) 6*10 6 (3) 4*10 6 (1) Est. a.frequency 10-3 (2) 10-2 (3) 10-4 (1) Est. a.fatality 10-5 (2) 10-4 (3) (1) A. Spill vol. 10 tons (1) 22 tons (2) 30 tons (3) Max. spill vol tons (3) 100 tons (1) 500 tons (2) 2013/1/18 35

36 Alternatives- the ranking index approach Platform 1 Platform 2 Platform 3 Costs (2) (3) (1) Est. a.frequency (2) (3) (1) Est. a.fatality (2) (3) (1) A. Spill vol. (1) () (2) () (3) () Max. spill vol. (3) (1) (2) Summation /1/18 36

37 Alternatives- the relative importance ranking approach Establishment of the relative weights of the importance that the assessment criteria/parameters are to be given Construction of the utility function for each safety parameter Formulation of the CBA table for each alternative Acquirements of the weights, total utility and ratio Comparison of the CB ratios between options, the lower the value the better 2013/1/18 37

38 Rlti Relative weights iht for each parameter Spill volume Economic loss Fatality Exposed population /1/18 38

39 Utility functions for the safety parameters 1 1 Utility 0U Utility Spill volume [tones] Economic losses [million] Public exposure Fatalities 2013/1/18 39 Utility Utility

40 Alternatives- the relative importance ranking approach (Platform 1) Priority Value Utility Weight Spill vol Eco. Loss * Fatalities Exposed population T. Utility Costs 800 Ratio /1/18 40

41 Alternatives- the relative importance ranking approach (Platform 2) Priority Value Utility Weight Spill vol Eco. Loss * Fatalities Exposed population T. Utility Costs 770 Ratio /1/18 41