ASSESSMENT OF CATASTROPHE RISK IN INDUSTRY

1. ASSESSMENT OF CATASTROPHE RISK IN INDUSTRY Paul Kleindorfer Technology and Operations Management, INSEAD UlkuOktem Risk Management and Decision Processes Center, Wharton School, University of Pennsylvania Near-Miss Management LLC.

2. Content • Catastrophic events and Near-Misses • Characteristics of Near-Misses and Near-Miss management • Current research and conclusions UlkuOktem, FOCAPO 2012

3. Catastrophic Events • Characteristics: • Low-probability, high-consequence events • Unplanned events resulting in significant business loss • Causes: • Natural hazards • Major accidents • Supply-chain disruptions • Product problems Ulku Oktem, FOCAPO 2012

4. Near-Miss Management Site vulnerability assessment should focus on: a) effective definition b) measurement c) auditing of performance - against Leading Indicators of Vulnerability and Resilience ORGANIC INTEGRATION INTO OPERATIONS AND EMPLOYEE/MANAGEMENT RESPONSIBILITIES IS ESSENTIAL Ulku Oktem, FOCAPO 2012

5. Defining a “Near Miss” Original Wharton Study “An opportunity to improve environmental, health and safety practice based on a condition, or an incident with potential for more serious consequences” Adoption to Financial Institutions: “Near-Miss is an event, a sequence of events, or an observation of unusual occurrences that posses the potential for improving a system’s operability by reducing the risk of upsets, some of which could eventually cause serious damage” DOE definition: “No barrier or only one barrier prevented an event from having a reportable consequence.” Ulku Oktem, FOCAPO 2012

6. Near-Miss Risk Pyramid Ulku Oktem, FOCAPO 2012

7. Examples of Near Misses • Bhopal, 1984 • Concept Sciences, 1999 • Barings Bank, 1995 • Fannie Mae, 2008 • Paddington train crash, 1999 • Sony battery case, 2006 • Biodiesel near-miss, 2007-2008 Ulku Oktem, FOCAPO 2012

8. Chemical Industry Review • Personal Near Misses • Observed and recorded • Process Near Misses • Not clearly defined, not systematically recorded • Operational Near Misses • Not recognized Known Catastrophic Events (major accidents) are generally the extension of process near-misses Ulku Oktem, FOCAPO 2012

9. Content • Catastrophic Events and Near Misses • Characteristics of Near Misses and Near-Miss Management • A powerful tool for risk management • Current research and conclusions Ulku Oktem, FOCAPO 2012

10. Characteristics of Near Misses These characteristics form the base of “Leading Indicators”: • Frequency • Actual Damage • Maximum Potential Damage Ulku Oktem, FOCAPO 2012

11. Near-Miss Management for Prevention of Catastrophe Core Concept for Near Miss Identification of early stress signals Elimination of the stressor Ulku Oktem, FOCAPO 2012

12. Methodology Three Pillars of Successful Near-Miss Management • Tracking and monitoring of near misses in each category • Organic integration of near-miss management into the operational fabric • Categorization of near misses Ulku Oktem, FOCAPO 2012

13. Organic Integration Every employee and manager has an active role and participates fully in the Near-Miss management process. Ulku Oktem, FOCAPO 2012

14. Categorization The overall risk has to be divided into meaningful categories that can be tracked. Examples: • Technology: 1. Process, 2. Procedures • Facility: 1. Mechanical Integrity, 2. Quality Assurance, 3. Process Hazard Analysis • Personnel: 1. Training, 2. Contractor Safety, 3. Management Leadership, 4, Operational Discipline, 5.Auditing, 4. Incident investigation, 5. Emergency Planning Ulku Oktem, FOCAPO 2012

15. Tracking and Monitoring Tracking and monitoring of Near Misses in each category should be based on the three characteristics: • Frequency • Actual Damage • Potential Damage Ulku Oktem, FOCAPO 2012

16. Tracking Example Sample Matrix for Near-Miss Tracking and Monitoring Ulku Oktem, FOCAPO 2012

17. Near-Miss Management Process Ulku Oktem, FOCAPO 2012

18. Content • Catastrophic Events and Near-Misses • Characteristics of Near-Misses and Near-Miss Management • Current research and conclusions Ulku Oktem, FOCAPO 2012

19. Current Research Personal Safety vs. Process Safety Ulku Oktem, FOCAPO 2012

20. Do We Learn from Past Catastrophic Events? 2011 Wharton Study: • In 2006 (after 2005 Katrina disaster) 1,299,000 new flood insurance policies were issued – compared to average of 850,000 • Three years later only 43% of the households still had National Flood Insurance Near Misses help corporations refresh their institutional memory and provide justification for taking corrective action. Ulku Oktem, FOCAPO 2012

21. Conclusions Industrial catastrophes are primarily, but not exclusively, driven by safety issues. A comprehensive Near-Miss management system - designed and implemented as an organic part of a company’s operational structure - can reduce significantly the occurrence and impact of catastrophes. Since most industrial catastrophes are the result of process safety issues, companies need to recognize the significance of differences between metrics to be used to assess personal safety and process safety. Ulku Oktem, FOCAPO 2012

22. For further questions, please contact: UlkuOktem oktem@wharton.upenn.edu