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Instruments and Approaches in Risk Analysis Session 3 Dr. Bijan Khazai Risk Analysis Fundamentals of Risk Analysis 1

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Risk Analysis Fundamentals of Risk Analysis Learning objectives Learn Probabilistic concept of risk. Concepts of return period, loss-frequency curve, average annual loss. Sources of uncertainty in risk analysis. Understand Difference between probabilistic and deterministic risk analysis. Outcomes of a scenario analysis. Depiction and ranking of risk through risk matrix and risk indexing. Components of a loss estimation model. Methodology of a cost-benefit analysis. Uses of a participatory risk analysis. 2

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Risk Analysis Fundamentals of Risk Analysis Risk There are two approaches to defining risk: Probabilistic Approach: Risk is defined as the likelihood (i.e., probability) of sustaining a certain level of loss during a given time period. Risk = Probability of an event occurring x impact of the event Deterministic Approach: The geographical distribution of the severity of loss due to the occurrence of a postulated event (i.e., Scenario). 3

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Risk Analysis Fundamentals of Risk Analysis Probabilistic Risk Analysis Probabilistic Risk Assessment answers three basic questions: What and where are the initiators or initiating events? What and how severe are the potential consequences? How likely will these consequences occur (probability or frequency)? In a PRA, risk is characterized by two quantities: The magnitude (severity) of possible adverse consequences The likelihood (probability) of occurrence of each consequence Probable losses (Billions Euros ) Value and Fragility of Exposed Assets Probability earthquake intensity will be exceeded during a particular time period (T = 200 yrs) 1510 x = 4

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Risk Analysis Fundamentals of Risk Analysis Uncertainty Estimating risk is fraught with lots of uncertainty. Dealing with uncertainty is the essence of risk analysis.. Uncertainty is the state of having limited knowledge. In probabilistic risk analysis, we can account for uncertainty. Uncertainties are inherent (for example) in: Hazard (spatial, temporal, dimensional) Susceptibility (physical, social, economic, etc.) Exposure Database (acquisition, transformation representation, change) Benefits of risk reduction measures 5

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Risk Analysis Fundamentals of Risk Analysis Return Period Return period also known as a recurrence interval is an estimate of the interval of time between events. An event with a 100-year recurrence interval will on average only occur once every 100 years. Return Period, in years (RP) Probability of occurrence in any given year Annual Probability of Exceedance (EP) Probability of Exceedance in 50 years 5001 in 5000.2%10% 2001 in 2000.5%25% 1001 in 1001%50% 501 in 502%100% 101 in 1010%500% RP = 1 EP Return period (RP) is the inverse of the probability that the event will be exceeded in any one year (Exceedance Probability, EP). 6

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Risk Analysis Fundamentals of Risk Analysis Exceedance Probability Curve The key relationship in managing risk is the exceedance probability (loss frequency) curve, which represents the relationship between frequency (Exceedence Probability) and severity (amount of losses). Area under curve = Average Annual Losses (AAL) Loss Amount ($US Million) 0 2 4 6 10 8 50100150 200250300 0 Annual Probability of Exceedance (%) 100 year loss (1% EP) = $US 125 million AAL = probability that event occurs * loss associated with event rare events, apply with caution! 7

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Risk Analysis Fundamentals of Risk Analysis Multiple Risk Mapping - AAL Average Annual Loss (AAL) presents a rational way to integrate risk associated with various hazards. An AAL value is calculated in each cell for any desired factor (e.g., Loss of housing units, economic loss, casualty, etc.). Cell Hazard Earthquake (AAL)Flood (AAL)Earthquake & Flood (AAL) Housing Units Economic Loss (1000$) CasualtiesHousingEconomic Loss (1000$) CasualtiesHousing Units Economic Loss (1000$) Casualties 11015055903152408 215300142550154035029 3301302057063520026 4120510208114013 50350271415274915 6512241029224 78501735115852 Total6969747832895015298697 8

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Risk Analysis Fundamentals of Risk Analysis Risk Matrix Analysis Risk Matrix presents a visual two-dimensional display of the “ranking” of the risk for a region: frequency and severity scale that is relevant to the region of interest. The scale will help in interpreting historical experience and translating expert opinion in a consistent manner. It is a simple approach for setting priorities. Severity (Loss) FrequencyFrequency Earthquakes Draughts Technological Floods Forest Fires Epidemics Low Very Low Medium High Very High High Medium Low Very Low Severity Index PercentRate PercentRate CasualtyDamage Frequency Index Exceedance Probability Return Period 9

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Risk Analysis Fundamentals of Risk Analysis Scenario Analysis A deterministic risk analysis or a scenario analysis is the process of analyzing the consequences - damages, losses or impacts - from a single postulated hazard event, e.g. a scenario. Choice between a probabilistic risk analysis and scenario analysis depends on the aims of the study. Scenarios Analysis (scenarios such as the worst case scenario) can be used in establishing a disaster risk management plan. Scenario events are not meant predict the next event. Different scenarios should be “simulated” to develop a comprehensive understanding of the potential impacts. 10

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Risk Analysis Fundamentals of Risk Analysis Loss Estimation Models 1. POTENTIAL HAZARDS 2. INVENTORY DATA 3. DIRECT DAMAGE 4. INDUCED DAMAGE 5. SOCIAL LOSSES 6. ECONOMIC LOSSES 7. INDIRECT LOSSES Loss estimation software packages can be used to identify the risk profiles and risk parameters of a region under the simulated events and display them in maps. 11

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Risk Analysis Fundamentals of Risk Analysis Cost-Benefit Analysis Cost-Benefit analysis (CBA) is a systematic procedure for evaluating decisions that have an impact on society. CBA provides comparison between the upfront investment costs of mitigation and the benefits of mitigation. CBA uses results of risk analysis to ensure effectiveness of protective measures by: Balancing the various interests of the stakeholders, Considering the reasonability (or utility) of measures, and Enabling consensus on strategies and measures to reduce risks Clarify objectives At outset, check objectives of conducting a CBA. Combination of scoping exercises, shared learning dialogues and more qualitative. 12

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Risk Analysis Fundamentals of Risk Analysis Cost-Benefit Analysis Methodology Cost-Benefit Analysis in the context of DRM requires: Assessment of risk, and Assessment of avoided risks. Vulnerability Exposure Fragility Capacities Source: Mechler, Reihnard Hazard Intensity Recurrence Risk Analysis: potential impacts without risk management Analysis of risk reduction: potential impacts with risk management 13 Net benefits Reduction of the potential impacts less Cost of risk reduction

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Risk Analysis Fundamentals of Risk Analysis Participative Risk Analysis A Participatory Risk Analysis is carried out with the participation of an affected target groups in cooperation with the experts and decision makers. “Participatory Appraisal” sociological approach of rapid, action-oriented assessment of local knowledge, needs, and potentials. Source: GTZ, Reconstruction after Hurricane Stan PRA can be used in: development of disaster emergency plans, arrangement and introduction of early warning systems for flooding implementation of disaster prevention exercises, development of prevention-based planning methods, in which risk analysis is part of the planning process. 14

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Risk Analysis Fundamentals of Risk Analysis Summary Probabilistic concepts Uncertainty, Return Period, Exceedance Probability, Loss-Frequency Curve, AAL. Probabilistic Risk Analysis: All potential impacts corresponding to a specific return period is assessed. Scenario (or Deterministic) Analysis/Loss Estimation Models Impact assessed for a postulated event over a defined spatial area. Risk Indexing/Mapping Key indicators of risk are aggregated in order to set priorities. Risk Matrix Analysis: Visual two-dimensional display of the “ranking” of the risk. Cost Benefit Analysis Upfront investment costs of mitigation vs. the benefits of mitigation. Participative Risk Analysis 15

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