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

Content Catastrophic events and Near-Misses Characteristics of Near-Misses and Near-Miss management Current research and conclusions Ulku Oktem, FOCAPO 2012

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

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

Defining a “Near Miss” 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.” 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” Ulku Oktem, FOCAPO 2012

Near-Miss Risk Pyramid Ulku Oktem, FOCAPO 2012

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, Ulku Oktem, FOCAPO 2012

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

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

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

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

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

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

Categorization The overall risk has to be divided into meaningful categories that can be tracked. Ulku Oktem, FOCAPO 2012 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

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

Tracking Example TechnologyFacilityPersonnel Frequency Actual Damage Potential Damage Ulku Oktem, FOCAPO 2012 Sample Matrix for Near-Miss Tracking and Monitoring

Near-Miss Management Process Ulku Oktem, FOCAPO 2012 Eight-Step Process 1. Identification 2. Disclosure 3. Prioritization 4. Distribution 5. Identification of Causes 6. Solution Identification 7. Dissemination 8. Resolution

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

Current Research Ulku Oktem, FOCAPO 2012 Personal Safety vs. Process Safety Initial Wharton Risk Center study focus on Personal Safety Recent Wharton-Chemical Engineering cooperative study focus expanded to Process Safety

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 Ulku Oktem, FOCAPO 2012 Near Misses help corporations refresh their institutional memory and provide justification for taking corrective action.

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. Conclusions Ulku Oktem, FOCAPO 2012 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. Industrial catastrophes are primarily, but not exclusively, driven by safety issues.

For further questions, please contact: Ulku Oktem