Challenges for current quantitative risk assessment (QRA) models to describe explicitly the road tunnel safety level

The number of road tunnels in Europe has increased rapidly over the last years. Nevertheless, this increasing number is raising upfront an endogenous problem, which is the severity of accidents that may occur. After the spate of tunnel fires in Europe over the past decade, the European Commission embarked upon a major review of road tunnel safety and launched the Directive 2004/54/EC that sets minimum safety requirements and suggests, apart from the measures imposed based on tunnel characteristics, the implementation of a risk assessment in several cases. As a result, many risk assessment methods have been proposed worldwide, most of them based on quantitative risk assessment (QRA) models. Although QRAs are helpful to address physical aspects and facilities of the infrastructures, current approaches in the road tunnel field have several challenges to meet in order to provide decision-makers with the overall risk picture. Taking into account that QRAs are progressively becoming the selected method to manage tunnel safety and risk, this paper’s purpose is twofold. On the one hand, it aims to inform safety managers and engineers about items which are not adequately handled by current road tunnel QRA models. On the other hand, it aims to suggest potential areas in which improvements should be made. Taking into consideration the challenges and the limitations discussed herein, this paper concludes that QRA models should not be the single criterion for the safety assessment process of these critical infrastructures.     

On long-term credit risk assessment and rating: towards a new set of models

Institutional investors are supposed to assess credit risk by using a combination of quantitative information such as option models and qualitative assessments. Although option models can be easily constructed, they are not so suitable for the assessment of long-term credit risk that is required by institutional investors. This is mainly because the probability of bankruptcy varies so widely depending on the timing of assessment. We propose a new set of assessment models for long-term credit risk which does not necessarily use stock prices and may incorporate business cycles. The new grand model consists of the two pillars: a long-term cash flow prediction model and a credit risk spread assessment model. The calculated values derived from these models are effectively usable for reasonable calculation of risk spreads. It is quite interesting to see that our investigation indicates that rating bias may exist in the credit risk assessment of the market.     

NUSAP: a method to evaluate the quality of assumptions in quantitative microbial risk assessment

The Numeral Unit Spread Assessment Pedigree (NUSAP) system was implemented to evaluate assumptions in a quantitative microbial risk assessment (QMRA) model for Salmonella spp. in minced pork meat. This QMRA model allows the testing of mitigation strategies for the reduction of human salmonellosis and aims to serve as a basis for science‐based policy making. The NUSAP method was used to assess the subjective component of assumptions in the QMRA model by a set of four pedigree criteria: ‘the influence of situational limitations’, ‘plausibility’, ‘choice space’ and ‘the agreement among peers’. After identifying 13 key assumptions relevant for the QMRA model, a workshop was organized to assess the importance of these assumptions on the output of the QMRA. The quality of the assumptions was visualized using diagnostic and kite diagrams. The diagnostic diagram pinpointed assumptions with a high degree of subjectivity and a high ‘expected influence on the model results’ score. Examples of those assumptions that should be dealt with care are the assumptions regarding the concentration of Salmonella on the pig carcass at the beginning of the slaughter process and the assumptions related to the Salmonella prevalence in the slaughter process. The kite diagrams allowed a clear overview of the pedigree scores for each assumption as well as a representation of expert (dis)agreement. The evaluation of the assumptions using the NUSAP system enhanced the debate on the uncertainty and its communication in the results of a QMRA model. It highlighted the model’s strong and weak points and was helpful for redesigning critical modules. Since the evaluation of assumptions allows a more critical approach of the QMRA process, it is useful for policy makers as it aims to increase the transparency and acceptance of management decisions based on a QMRA model.     

A conceptual Object-Oriented Bayesian Network (OOBN) for modeling aircraft carrier-based UAS safety risk

This paper illustrates the conceptual development of a demonstration Object-Oriented Bayesian Network (OOBN) to integrate the hazards associated with an experimental Unmanned Aircraft System (UAS) planned for deployment from an aircraft carrier. The final Air/Ship Integration (A/SI) demonstration model is characterized by a top-level Bayesian network model with nine sub-nets comprising 70 causal factors with 15 mitigations. With the creation of a probabilistic model, inferences about changes to the states of the causal factors given the presence or absence of controls or mitigations can be ascertained. These inferences build on qualitative reasoning and enable an analyst to identify the most prominent causal factor groupings leading to a prioritization of the most influential causal factors. Mitigation effects can be systematically studied and assessed. The A/SI OOBN demonstration model illustrates the construction of an integrative safety risk model that may be used to compute a higher-order system mishap probability for an experimental UAS that interacts with ship operations in a highly severe, dynamic sea environment. In addition to computing mishap probabilities, the Bayesian approach may also be used to support control contingency management for possible mitigation implementation.     

Implementing control mutuality using prediction markets: a new mechanism for risk communication

In this article prediction markets are presented as an innovative technology that can facilitate effective risk communication. The application of prediction markets in this context is an opportunity to reconcile the disparate approaches currently discussed in the risk communication literature. We demonstrate that control mutuality is uniquely achieved through the use of the prediction market mechanism and it is thus an innovative and in some cases optimal technology for use in risk communication in both public and private sector organisations.     

Reducing microbiological risk in the kitchen: piloting consensus conference methodology as a communication strategy

Foodborne diseases are a major public health problem. Improper storage and food preparation at home can favour microbial contamination of food. Consumers play a crucial role in controlling this risk. To reduce exposure to risk, it is essential to provide information and guidance on contamination management in the home. The aim of this study was to pilot a method of participatory communication addressed to young consumers and designed to reduce the microbiological risks associated with the consumption of meat products. The methodology was based on application of the ‘consensus conference’ model on food safety issues. The consensus conference served not only as a participatory strategy to share knowledge but also as a method for sharing in the development of risk communication content (guidelines) to be disseminated to the reference target. Young people’s perceptions, habits and behaviour in the kitchen were explored in the preparatory stage of the consensus conference by means of a survey and a focus group. Three consensus conferences were held in Italy attended by 60 university students (19 and 22 years old). Application of the consensus conference model as a communication process proved to be an effective opportunity to engage young consumers and experts on the topic of food safety. This discursive participation approach was broadly welcomed by the participants. Specifically, direct interaction with the experts was considered to be an important part of the communication process. The findings of the project were used to select concise communication content based on the perceptions, behaviours and fact-finding needs of the selected target. Publication of this content in the form of guidelines on microbiological risk management at home has enabled the results of the consensus conferences to be extended and the targeted communication material on risk reduction in daily food handling practices to be disseminated.     

Risk and safety in large-scale socio-technological (military) systems: a literature review

Contemporary military practice relies more and more on technology and its artefacts and seem to have become, thereby, large-scale socio-technological systems; systems in which the social and the technological are closely tied together. An important issue in these kinds of systems, especially military ones, is how to safely use this technology. This paper reviews the literature for research on risk and safety in large-scale socio-technological systems for their ability to account for the complex dynamics from which safety in these kinds of systems tends to emerge – or not. After this, it evaluates some current accounts of risk and safety in the military specifically, so as to assess the ‘status’ – or analytical strength – of accounts of risk and safety in this domain. More rigour is needed in evaluations of risk and safety of technology in the military so as to provide analyses with sufficient analytic strength. This rigour, it turns out, can often be found in the interdisciplinary STS (science, technology and society) literature that, until today however, does not often seem to address risk and safety of large-scale socio-technological systems directly, and which seems to pay even less attention to risk and safety in the military.     

Predictors of unrealistic optimism: a study of Norwegian risk takers

In areas of voluntary risk behaviour, as with other kinds of risk, people tend to be overly optimistic regarding not being injured. A study of risk perception and causal explanations of injury assessments was conducted on 199 respondents from three different sub‐groups in Norway; skydivers (n?=?88), fire fighters (n?=?73) and soldiers (n?=?38). Unrealistic optimism was studied by means of four demographic variables: the background of the subject (sub‐sample), gender, age, and education. In addition, three predictors of unrealistic optimism were taken into account—safety attitudes, control, and anxiety. These predictors were included in an Analysis of Linear Structural Relationship (LISREL) analysis. The results showed that optimism differed between the sub‐groups, and that different factors influenced risk perception depending on the group and depending on whether the assessment was of oneself or of others. These findings offers additional information that will help explain the inconsistent findings in the current literature of unrealistic optimism. Of the predictors investigated, safety attitudes were found to be the most important, which may be because respondents preoccupied with safety are more aware of potential dangers and thereby less optimistic.     

Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing

Most structural models of default risk assume that the firm's asset return is normally distributed, with a constant volatility. By contrast, this article details the properties that the process of assets should have in the case of financially weakened firms. It points out that jump-diffusion processes with time-varying volatility provide a refined and accurate perspective on the business risk dimension of default risk. Representative Arrow-Debreu state price densities (SPD) and term structures of credit spreads are then explored. The credit curves show that the business uncertainties play a major in the pricing of corporate liabilities.     

GIRA: a general model for incident risk analysis

Most existing risk analysis methods focus on analysing risks that a system might face throughout its life. However, there is no explicit method for risk analysis during incidents. Approaches such as bow-ties and attack trees provide reliable information about triggers and escalation of incidents, but do not cover risk evaluation. Risk matrices include the entire risk analysis process; however, their risk evaluation approach is oversimplified. This paper presents a General Model for Incident Risk Analysis, which formalises the incident risk analysis process through an influence diagram. Our aim is to provide a decision support model that generates reliable risk information and enhances incident risk evaluation.     

Constant Proportion Debt Obligations (CPDOs): modeling and risk analysis

Constant Proportion Debt Obligations (CPDOs) are structured credit derivatives that generate high coupon payments by dynamically leveraging a position in an underlying portfolio of investment-grade index default swaps. CPDO coupons and principal notes received high initial credit ratings from the major rating agencies, based on complex models for the joint transition of ratings and spreads for all names in the underlying portfolio. We propose a parsimonious model for analysing the performance of CPDO strategies using a top-down approach that captures the essential risk factors of the CPDO. Our approach allows us to compute default probabilities, loss distributions and other tail risk measures for the CPDO strategy and analyse the dependence of these risk measures on various parameters describing the risk factors. We find that the probability of the CPDO defaulting on its coupon payments can be made arbitrarily small—and thus the credit rating arbitrarily high—by increasing leverage, but the ratings obtained strongly depend on assumptions on the credit environment (high spread or low spread). More importantly, CPDO loss distributions are found to exhibit a wide range of tail risk measures inside a given rating category, suggesting that credit ratings are insufficient performance indicators for such complex leveraged strategies. A worst-case scenario analysis indicates that CPDO strategies have a high exposure to persistent spread-widening scenarios and that CPDO ratings are shown to be quite unstable during the lifetime of the strategy.     

The new political importance of the old hurricane risk: a contextual approach to understanding contemporary struggles with hurricane risk and insurance

In the United States, policy-makers struggle to resolve conflict between public demands for affordable insurance costs covering hurricanes and market demands for risk-based insurance pricing. Given the socially constructed nature of risk, a risk-based pricing approach prioritizes insurer values and business practices over all societal value goals expressly limiting democratic inclusion in decision-making about risk. As a step towards the more democratically inclusive approach of risk governance, this article uses the state of Florida as a case study to provide a narrative of the social and political context for the evolution of the idea of U.S. hurricane risk. I argue that today’s hurricane risk is a product of long-standing shared efforts to build prosperity. However, it is no longer a simple risk for society to overcome on its way to economic well-being. Contemporary hurricane risk is systemic and serves as a nexus for political battles over American values.     

Idiosyncratic risk and the cross-section of stock returns: Merton (1987) meets Miller (1977)

Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] predicts that idiosyncratic risk should be priced when investors hold sub-optimally diversified portfolios, and cross-sectional stock returns should be positively related to their idiosyncratic risk. However, the literature generally finds a negative relationship between returns and idiosyncratic risk, which is more consistent with Miller's [1977. Risk, uncertainty, and divergence of opinion. Journal of Finance 32, 1151–1168] analysis of asset pricing under short-sale constraints. We examine the cross-sectional effects of idiosyncratic risk while explicitly recognizing the confounding effects that dispersion of beliefs and short-sale constraints produce in the Merton framework. We find strong support for Merton's [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] model among stocks that have low levels of investor recognition and for which short selling is limited. For these stocks, the relation between idiosyncratic risk and expected returns is positive, as predicted by Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510].     

Standards for risk assessment of standards: how the international community is starting to address the risk of the wrong standards

Technical standards pervade commerce and society and allow the complexity of modern life to operate at all levels, global included. They also provide protection against many risks, whether from food, from dangerous products or from fraud. They are so self-evidently worthy that they are rarely challenged, yet anything as powerful and pervasive as the web of standards needs some element of oversight and quality assurance. There is a danger of over-regulating and the placing of unnecessary constraints on the market and, cumulatively, a constraint on liberties. Technical standards are derived from many sources and for many reasons. The oversight function may need to relate to these reasons, such as the World Trade Organisation controls on damage to trade through protectionist standards. A very common reason for standards is safety, which tends to be treated as an absolute, as an objective technical matter, and there is less oversight or quality assurance of standards set for safety reasons. But safety is a relative term and increases in safety will usually have costs. Judgement needs to be applied in a risk assessment but that raises institutional issues as to who is qualified to apply that judgement. There are also issues of the accountability of those who increase the safety ratchet, which are also related to the institutional issue. This paper explores a case study of one draft standard as an illustration of the need for oversight and then goes on to consider methods of managing the risks inherent in standardisation and technical regulation. It looks in particular at two recent initiatives from within the standards community itself. One is a broad-based proposal for the community to focus on risk management and the other is an instance where a technical regulator has commissioned and designed an impact assessment system in order to provide that quality assurance and accountability.     

Risk assessment of option performance for new product and process development projects in the chemical industry: a case study

This paper presents as a case study, empirical research forming part of a large EPSRC‐funded project to decrease new product and process development times within the UK fine chemicals industry. The work aimed to design a decision support system to evaluate competing options in such development projects. Theoretical and practical contributions from academic and industrial collaborating groups were integrated using Action Research. High levels of risk when bringing new products to market or new processes on line means that risk assessment features significantly when evaluating different project options. A key research target, and the concern of this paper, is the design and use of a risk assessment tool (RAT) to fit the context of the overall decision support system. Collectively the tools enabled the options within individual projects to be evaluated on risk and other performance dimensions. Industrialists provided a number of comprehensive case studies to test the suite of tools. Theoretical and empirical implications are discussed.     

(Non-)robustness of maximum likelihood estimators for operational risk severity distributions

The quality of operational risk data sets suffers from missing or contaminated data points. This may lead to implausible characteristics of the estimates. Outliers, especially, can make a modeler's task difficult and can result in arbitrarily large capital charges. Robust statistics provides ways to deal with these problems as well as measures for the reliability of estimators. We show that using maximum likelihood estimation can be misleading and unreliable assuming typical operational risk severity distributions. The robustness of the estimators for the Generalized Pareto distribution, and the Weibull and Lognormal distributions is measured considering both global and local reliability, which are represented by the breakdown point and the influence function of the estimate.     

Risk association: towards a linguistically informed framework for analysing risk in discourse

This article addresses a fundamental feature of risk discourse, namely, risk association, defined as the process whereby an agent establishes a connection between something, x, and the notion of risk. In addition, risk association can be defined as the result of such a process, i.e. an established connection between x and risk. A special case of risk association is when x is linked to harmful properties and thus is represented as a risk. Although fundamental to any analysis of socio-cognitive attention to risks, the process of risk association is often taken for granted in risk research. A layered model of risk association is presented taking linguistic practices, i.e. the use of words, as the point of departure. Accordingly, there are both central and more peripheral means of risk association. The central means include the morpheme ‘risk’. More peripheral means of risk association are close synonyms and antonyms of risk (e.g. ‘hazard’, ‘danger’, ‘safety’ and ‘security’) and other related words (e.g. ‘crisis’, ‘protection’ and ‘threat’). For an illustration, the model is applied to an empirical example: the instructions for Swedish government agencies. The example illustrates how the exact vocabulary considered for operationalization in analysis has important consequences for the conclusions that follow with respect to the extent to which government agencies are associated with risk.     

The Basel Committee proposals for a new capital accord: implications for Italian banks

Following a few general considerations on the recently proposed revision of the Basel Agreement on capital adequacy, this paper focuses on the first pillar of the Basel Committee proposals, the handling of capital requirements for credit risk in the banking book. The Basel Committee envisages an approach alternatively based on external ratings or on internal rating systems for the determination of the minimum capital requirement related to bank loan portfolios. This approach supports a system of capital requirements that is more sensitive to credit risk. On the basis of specific assumptions, these requirements provide a measure of the value at risk (VaR) produced by models used by major international banks. We first address the impact of the standardised and (internal ratings-based) IRB foundation approach using general data on Italian banks loans' portfolios default rates. We then simulate the impact of the proposed new rules on the corporate loan portfolios of Italian banks, using the unique data set of mortality rates recently published by the Bank of Italy. Three main conclusions emerge from the analysis: (i) the standardised approach implicitly penalizes Italian banks in their interbank funding as their rating is generally below AA/Aa, (ii) the average default rate experienced by Italian banks is higher than the one implied in the benchmark risk weight (BRW) proposed by the Basel Committee for the IRB foundation approach, thereby potentially leading to an increase in the regulatory risk weights, and (iii) the risk-weight is based on an average asset correlation that is significantly higher than the one historically recorded within the Italian banks' corporate borrowers. These findings support the need for a significant revision of the basic inputs and assumptions of the Basel proposals. Finally, in relation to the conditions that allow the capital market to effectively discipline banks, we comment on the proposals advanced in relation to the third pillar of the new capital adequacy scheme.     

GIS-based DRASTIC method for groundwater vulnerability assessment: a review

Groundwater vulnerability is a burning issue all over the world due to the deterioration of groundwater level and increasing contamination which poses serious detrimental risk to the environment. To identify this risk, extensive research has been carried out to assess the groundwater vulnerability by using different methods. Generally, the process-based method, statistical method, and overlay & index methods are used in this regard. DRASTIC method is one type of overlay & index method for vulnerability assessment. This paper represents a comprehensive review of available literature on the applications of Geographic Information System (GIS)-based DRASTIC method for groundwater vulnerability assessment. Also, some other types of overlay & index methods are compared with the DRASTIC method. This study discusses the rescaling of rating ranges and modification of DRASTIC parameters, and shows the comparison of DRASTIC method with other vulnerability assessment methods. In addition, this study identifies some research gaps on the present state of groundwater vulnerability assessment and proposes some research needs for further studies. The findings of this study indicate that the combination of GIS and DRASTIC are more viable for groundwater vulnerability assessment. Furthermore, modified DRASTIC method can be used for agricultural, arid, semi-arid, and basaltic regions.     

Reliability rating and reflective questioning: a case study of extended review on Australia's risk assessment of Bt cotton

The governance of emerging technologies is frequently constructed around risk assessment processes. However, when risk assessment as a decision‐making tool is applied to controversial fields such as genetic modification, stem cell research and nano‐scaled science and technology, inherent uncertainties and conflicting social values arise to challenge the adequacy of traditional approaches. In this paper, I propose a framework through which risk assessments may be exposed to a process of ‘extended review’, incorporating both natural and social science quality criteria and modes of reflection. I call this framework ‘Reliability Rating and Reflective Questioning’. The framework is developed through a detailed case study review of a particular risk assessment document. The case study risk assessment reviewed in this paper is that performed by an Australian governmental authority on the impact of genetically modified ‘Bt’ cotton on non‐target organisms. Through highlighting errors, misrepresentations, assumptions and embedded value judgements within the risk assessment document, I argue that the framework of ‘Reliability Rating and Reflective Questioning’ can serve as a useful tool for gauging and improving the quality of risk assessment, especially when used as a decision‐making tool for emerging technologies with high levels of uncertainty and strongly conflicting values.