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”
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
Near-Miss Risk Pyramid
Lagging Indicators
Major
Accidents
Significant-Loss
Events
Minor-Loss Events
Risk Perception
Leading Indicators
Near-misses
Accidents
High
Risk
Foreshadowing Events and Observations
Positive Illusions, Unsafe Conditions and Unobserved Problems –
Unawareness, Ignorance, Complacency
No
Risk
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, 2007-2008
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
Known Catastrophic Events (major accidents) are
generally the extension of process near-misses
Ulku Oktem, FOCAPO 2012
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
Core Concept for Near Miss
Identification of
early stress
signals
Elimination of
the stressor
Ulku Oktem, FOCAPO 2012
Methodology
Three Pillars of Successful Near-Miss Management
Organic
integration of
near-miss
management
into the
operational
fabric
Categorization
of near misses
Ulku Oktem, FOCAPO 2012
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.
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
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
Sample Matrix for Near-Miss Tracking and Monitoring
Technology
Facility
Frequency
Actual
Damage
Potential
Damage
Ulku Oktem, FOCAPO 2012
Personnel
Near-Miss Management Process
Eight-Step Process
1. Identification
2. Disclosure
3. Prioritization
4. Distribution
5. Identification of Causes
6. Solution Identification
7. Dissemination
8. Resolution
Ulku Oktem, FOCAPO 2012
Content
• Catastrophic Events and Near-Misses
• Characteristics of Near-Misses and Near-Miss
Management
• Current research and conclusions
Ulku Oktem, FOCAPO 2012
Current Research
Personal Safety vs. Process Safety
Initial
Recent
• Wharton Risk Center study
focus on Personal Safety
• Wharton-Chemical Engineering
cooperative study focus
expanded to Process Safety
Ulku Oktem, FOCAPO 2012
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
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
For further questions, please
contact:
Ulku Oktem
oktem@wharton.upenn.edu