Applications of QRA to Aid Decision Making
Jack Barnett
Marsh Risk Consulting
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Presentation Overview
1. Who is MRC?
2. Applications of QRA to Aid Decision Making

Mitigation Strategy Optimisation

Quantitative Risk Profiling

Setting of Insurance Limits

Conceptual Closure Planning
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Who is MRC?
Marsh Risk Consulting
Our value proposition

is dedicated to providing advice and solutions to a comprehensive
range of client risk issues, insurable and non-insurable

works for clients in all industries, across all geographies

is focused on helping clients to reduce their cost of risk and improve
their economic outcomes

provides risk insight that helps our clients to make the right decisions,
that will in turn help them achieve their objectives

helps clients to mitigate, reduce and eliminate risk and understand the
risks they can take
Works as one global team, with one integrated service…one MRC
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Marsh Risk Consulting
Products & Services
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Marsh Risk Consulting
Managing risk, meeting objectives

Marsh Risk Consulting helps its clients to manage the risks they choose to take…
Volatility (+)
Expected performance
Risks our clients take
e.g.
Volatility (-)
Restructuring
Divestments
Acquisitions
Products/ markets
Outsourcing /
supply chain reengineering
New sources
of financing
…through the complete lifecycle of risk
Risk
Identification &
Assessment
Quantification
& Prioritization
Prevention
& Resiliency
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Governance
Mitigation
Risk
Transfer &
Retention
Post Event
(Bad Outcome)
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Marsh Risk Consulting
Managing risk, meeting objectives

Marsh Risk Consulting helps its clients to manage their unplanned risks…
Unplanned risk
Volatility (+)
e.g.
Business interruption
Loss of suppliers
Expected performance
Major fire / flood
Competitor actions
Employee injury
Volatility (-)
Litigation
Unplanned risk
…through the complete lifecycle of risk
Risk
Identification &
Assessment
Quantification
& Prioritization
Prevention
& Resiliency
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Mitigation
Risk
Transfer &
Retention
Post Event
(Bad Outcome)
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What does “Risk Management” Mean?
 Risk Management is just good Management
 Not separate from, but intrinsic to
 Risk Management = Management of Risk
 The Wise Allocation of Scarce Resources
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ROI Model
Mitigation Strategy Optimisation
Background
Marsh Risk Consulting’s (MRC’s) Return on Investment (ROI) Analysis tool is
based on best practice risk management and accounting principals to assist
clients make an informed decision on risk management investments.
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MRC Expertise
The pacific arm of MRC have for over a decade applied best practise risk
management principals to assist clients to prioritise operational risk treatment
investments, such as:
 Installation of fire systems for protection of:
– transformers
– switchrooms
– control rooms
– conveyors
 Upgrades of levee walls at salt mining operations
 Duplication or otherwise of production machinery and distribution centres
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Improved Offering
Through collaboration with Marsh’s Forensic Accounting, Actuarial and Specialist
Risk Engineering divisions MRC have developed models with:
 Improved QRA methodology, better harnessing the power of the stochastic
modelling software, @risk
 Increased accounting rigour to present results in the format required by CFO’s; and
 Improved collation and analysis of failure likelihood data.
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Example Application
Mining Client Switchroom Upgrade
Detailed Methodology
Scope & Approach
 Determine the cost effectiveness of
– Repairing/upgrading existing fire protection systems
– Installing new systems
– Removing systems with a very high payback period
– Reconstruction of EPS switchrooms with non-combustible material
 Using Precision Tree & @RISK annualised risk is quantified before and after
implementation of risk treatment
 Accounting for initial investment NPV and/or ROI
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Detailed Methodology
Overview
1. Site surveys
2. Risk workshops to quantify current level of risk through:
• Estimation of varying consequential pathways using precision tree
• Assigning of probabilities to each pathway based on existing controls
• Likelihood of fire event based on credible failure sources
The product of likelihood and consequences yields the risk,
ie: Risk ($/year) = Consequences ($/fire) x Likelihood (fires/year)
3. Evaluate the risk reduction benefits of each fire protection alternative
4. Determine the ROI accounting for initial investment & ongoing costs
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Detailed Methodology
Example Consequence Model Quantified in Workshop
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Detailed Methodology
Description of Consequence Model
 The previous model reflects the different consequence paths possible.
 By estimating the relative probability that each pathway will be followed we
can estimate an average consequence for fire in the switchroom.
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Detailed Methodology
Summary of Modelling Techniques
 Consequence estimates and likelihoods of fire spread and effective manual
response are generated in workshops with expert personnel.
 @RISK used.
C pathwayapplied to best case, most likely and worst case scenarios in
 ―Pert‖ distribution
terms of PD, BI, PL, ICOW etc.
 The Pert distribution is essentially a skewed normal or Beta distribution that
requires the same three input parameters to a Triangular distribution, however
interprets them with a smooth curve that places less emphasis on the furthest
extremes (4x weighting on Mode)
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Detailed Methodology
Summary of Frequency Techniques
 Results are heavily reliant on failure likelihood data therefore reliable loss history
data is required
 A minimum of five reliable sources will be used for any study and these will be
calibrated to the given situation depending on equipment type, protection systems
installed, condition, load and other environmental factors
 Expected failure rate is calculated by accounting for reliability of each data source
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Detailed Methodology
Discounted Cash Flow Models & @RISK Output
 DCF models are produced for the current case and each treatment alternative
using inputs from the frequency and consequence models, thus providing the
present value of each alternative.
 50,000 simulations are run to obtain our outputs, as shown below.
 Shows various percentiles of:
– Unmitigated Loss
– Mitigation Strategy Cost
– Mitigation Strategy Loss
– Mitigation Strategy Cash Flow
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Detailed Methodology
ROI Analysis
PV of Current Case
Losses
Mean
Stdev.
Option 1 NPV
PV of Option 1
Loss Event/s
Option 2 NPV
PV of Option 2
Loss Event/s
Option 3 NPV
PV of Option 3
Loss Event/s
78,524,210
420,429,100
2,106,830
211,280
4,496,297
19,268,040
2,235,151
152,398
16,087,850
195,405,400
2,798,975
222,173
33,968,820
235,403,500
5% Perc
10% Perc
15% Perc
20% Perc
25% Perc
30% Perc
35% Perc
40% Perc
45% Perc
50% Perc
55% Perc
60% Perc
65% Perc
70% Perc
75% Perc
80% Perc
85% Perc
90% Perc
95% Perc
96% Perc
97% Perc
98% Perc
99% Perc
99.8% Perc
99.9% Perc
DO
47,656,110
88,767,480
163,364,500
358,405,600
448,551,089
579,716,923
810,749,316
1,331,943,897
3,630,100,157
5,377,736,415
56,841,491
1,759,743
1,831,715
1,883,623
1,924,671
1,959,917
1,992,013
2,022,569
2,051,437
2,078,887
2,105,768
2,133,888
2,162,482
2,190,888
2,220,739
2,252,739
2,288,530
2,329,987
2,380,897
2,457,863
2,477,361
2,502,032
2,536,231
2,591,206
2,684,483
2,715,481
3,826,416
6,786,644
11,341,780
22,362,320
26,923,911
33,386,511
44,871,656
72,530,906
179,271,277
250,315,791
2,606,469
1,982,861
2,033,235
2,069,780
2,099,463
2,126,484
2,151,562
2,173,801
2,195,053
2,215,317
2,235,464
2,254,750
2,275,086
2,296,850
2,319,220
2,342,804
2,369,892
2,400,943
2,436,837
2,487,932
2,501,307
2,517,525
2,537,422
2,568,385
2,615,167
2,633,333
61,096,333
99,858,221
174,862,509
360,129,432
1,202,698,346
2,006,579,018
17,356,550
2,434,931
2,511,343
2,563,358
2,606,925
2,644,049
2,677,391
2,708,516
2,739,108
2,768,635
2,797,178
2,827,201
2,856,755
2,887,273
2,918,934
2,952,552
2,990,106
3,033,684
3,086,874
3,167,851
3,190,493
3,218,314
3,254,814
3,304,878
3,416,824
3,455,564
13,340,670
32,710,950
65,777,080
155,034,200
194,540,755
249,291,545
348,156,814
580,157,613
1,606,430,582
2,162,525,968
21,631,865
Value of Mitigation
Cost of Mitigation
Mitigation 1
54,235,022
2,106,830
Return on Investments
2474%
Mitigation 2
39,484,940
2,235,151
1667%
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Mitigation 3
35,209,626
2,798,975
1158%
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Detailed Methodology
ROI Analysis
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Discussion Items
Opportunities
 Technique can be used to present a business case for any kind of risk mitigation or
business improvement alternative
 Modelling can be simplified by removing the decision trees at the front end if
necessary
 Can be delivered very cost effectively
 Modelling can be completed remotely whilst information is captured via customised
audit templates utilising the local risk engineer
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Discussion Items
Opportunities: Incorporation of Risk Bearing Capacity
 Loss distribution curves (with purchase of contingent capital)
– Shift to the left
– Contract (reduced skew)
 Quantify Value
– Discounted Expected Loss Reduction (same for everyone)
– Reduction of Variability of Outcomes (client specific based on financials)
 Relative Measures (Standard Deviation)
 Detrimental Outcomes (Area in the Tail)
Loss Distribution with & without Risk Transfer
Relative Uncertainty Measure
Insurance Program Optimization
Probability of Loss
20.00%
RBC Measure =$25M
10.00%
0.00%
1
11
21
31
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Client Retained Loss ($Millions)
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Discussion Items
Limitations
 Results are heavily reliant on failure likelihood data therefore reliable loss history
data is required
 Collation of accurate BI data can be challenging
 Results are heavily influenced by distribution assumptions and the variability
around expected values
 Correlations between input parameters need to be accurately modelled
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Project Contingencies
Risk Based Approach
Risk and Opportunity Contingency Assessment
Contingency Quantification for Major Infrastructure Projects
Rank
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Sensitivity
Name
Regr
Corr
#1
Change to detailed work content
0.961
0.960
#2
Old mine workings - during constr.
0.118
0.106
#3
Alternative pipeline constr. method
0.113
0.107
#4
Mine workings after construction
0.102
0.106
#5
Failure of key equipment
0.094
0.071
#6
Misalignment of pipeline
0.092
0.083
#7
Unbudgeted insurance incidents
0.080
0.060
#8
Conflict with other projects
0.053
0.039
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Project MFL Studies
Setting of Insurance Limits
MFL Study Overview
 Use of PHAST modelling to understand overpressure contours as a
result of potential, jet flame, fire ball or explosion events
 Combined with @Risk modelling to present potential losses as a
cumulative distribution
 Use of Precision Tree to quantify likelihood pathways
 Used by projects to structure their insurance program and/or to obtain
regulatory approval as part of the EIA process
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MFL Study
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Comparison with Risk Criteria
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Safety Applications
Water Corporation QRA
 Probability of hazardous electric shock occurring to a person in contact
with a 106km trunk main
 Utilised Fault and Event Tree Analyses
 Quantified using modelling software, fault history and exposure statistics
 Stochastic distributions applied
 Results plotted against Dam Safety Guidelines to provide comparable
representation of the problem
 Assisted in fund allocation
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Water Corporation QRA
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Conceptual Closure Planning
Conceptual Closure Plan
Breaking the ―Problem‖ into manageable units
 Domains used as the basis to record
– Specific features & challenges
– Target land use & success criteria
– Assumptions
– Likely and possible actions required (Decision Trees)
– Cost estimations for actions & post closure requirements
 Minimum costs
 Maximum costs
 Mostly likely costs
– Nominated review timeframe
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Domain Boundaries
Example – Refinery & Port
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Conceptual Closure Plan
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Conceptual Closure Plan
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Closure Cost Estimation – 2005
Probability Distribution Curve
Gove Overall
Outcome ($M)
250
240
230
220
210
200
0%
20%
40%
60%
80%
100%
Probability
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75th Percentile
= $???M
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Consistent Method
Benefits
 Compliance with financial disclosure obligations
– Sarbanes-Oxley & NYSE requirements
 Enhancement of shareholder value through clear process for
evaluating liability estimations, ie:
– Expected cost of closure obligations
– Expected liability limits related to ―property/ environmental‖
exposures
– Corporate liability estimate
Corporate Entity
Liabilities
 Consistent approach group wide
 Risk-based determination of estimates
 Ease of update (annually or otherwise)
 Demonstration of reasonableness
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Site Z
Site X
Site Y
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Other questions where QRA techniques have been applied..
A haul road and public access road are intersecting how can we better
understand the risk to the public and invest in appropriate mitigation?
We have developed a new cancer test and want to understand hurdles to
successful product introduction to the US
We want to better understand how to design the optimum open cut pit wall
angle
Our personnel and clients are experiencing electric shock due to
replacement of steel with plastic piping – how do we better prioritise
resources towards mitigation..
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Contacts
Please contact Jack Barnett, Senior Consultant of Marsh for further details
Jack.barnett@marsh.com
02 8864 7184
0405 223 0784
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Conceptual Closure Planning
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