Operational Safety Economics A Practical Approach focused on the Chemical and Process Industries

Describes how to make economic decisions regading safety  in the chemical and process industries

• Covers both technical risk assessment and economic aspects of safety decision-making
• Suitable for both academic researchers and practitioners in industry
• Addresses cost-benefit analysis for safety investments

Genserik Reniers is Professor at the TU Delft (Safety Science Group, Faculty of Technology, Policy and Management, The Netherlands), Professor at the HUB campus of the KULeuven (CEDON, Faculty of Economics and Management, Belgium) and at the University of Antwerp (ARGoSS, Faculty of Applied Economic Sciences, Belgium).
He received his PhD in Applied Economic Sciences from the University of Antwerp, after completing a Master's degree in Chemical Engineering at the Vrije Universiteit Brussels. His main research interests concern the collaboration and interaction between safety and security topics and socio-economic optimization within the chemical industry.
Genserik has authored, co-authored, edited or co-edited more than 20 books in the field of safety and/or security in the process industries, and he is Receiving editor for the Journal of Loss Prevention in the Process Industries (JLPPI), and Associate Editor of Safety Science, two very well-known academic journals in the research field. He has taught safety and security economics (as part of larger courses) since 2006 both at the University of Antwerp and at the HUB-campus of the KULeuven.

Preface xi

Disclaimer xiv

Acknowledgements xv

List of Acronyms xvii

1 Introduction 1

1.1 The “Why” of Operational Safety 1

1.2 Back to the Future: the Economics of Operational Safety 3

1.3 Difficulties in Operational Safety Economics 4

1.4 The Field of Operational Safety within the Profitability of an Organization 5

1.5 Conclusions 6

References 7

2 Operational Risk, Operational Safety, and Economics 8

2.1 Defining the Concept of Operational Risk 8

2.2 Dealing with Operational Risks 10

2.3 Types of Operational Risk 11

2.4 The Importance of Operational Safety Economics for a Company 15

2.5 Balancing between Productivity and Safety 18

2.6 The Safety Equilibrium Situation or “HRO Safety” 19

2.6.1 HRO Principle 1: Targeted at Disturbances 20

2.6.2 HRO Principle 2: Reluctant for Simplification 21

2.6.3 HRO Principle 3: Sensitive toward Implementation 21

2.6.4 HRO Principle 4: Devoted to Resiliency 21

2.6.5 HRO Principle 5: Respectful for Expertise 22

2.7 The Egg Aggregated Model (TEAM) of Safety Culture 22

2.8 Safety Futures 24

2.9 The Controversy of Economic Analyses 25

2.10 Scientific Requirements for Adequate Economic Assessment Techniques 26

2.11 Four Categories of Data 27

2.12 Improving Decision-making Processes for Investing in Safety 28

2.13 Conclusions 29

References 30

3 Economic Foundations 31

3.1 Macroeconomics and Microeconomics 31

3.2 Safety Demand and Long-term Average Cost of Production 32

3.2.1 Safety Demand 32

3.2.2 Long-term Average Cost of Production and Safety 33

3.3 Safety Value Function 35

3.4 Expected Value Theory, Value at Risk, and Safety Attitude 37

3.4.1 Expected Value Theory 37

3.4.2 Value at Risk 38

3.4.3 Safety Attitude 39

3.5 Safety Utilities 40

3.5.1 Safety Utility Functions 40

3.5.2 Expected Utility and Certainty Equivalent 41

3.6 Measuring Safety Utility Functions 42

3.7 Preferences of Safety Management – Safety Indifference Curves 43

3.8 Measuring Safety Indifference Curves 45

3.8.1 Questionnaire-based Type I Safety Indifference Curves 45

3.8.2 Problems with Determining an Indifference Curve 48

3.8.3 Time Trade-off-based Safety Utilities for Type II Safety Indifference Curves 48

3.9 Budget Constraint and n-Dimensional Maximization Problem Formulation 50

3.10 Determining Optimal Safety Management Preferences within the Budget Constraint for a Two-dimensional Problem 52

3.11 Conclusions 54

References 54

4 Operational Safety Decision-making and Economics 55

4.1 Economic Theories and Safety Decisions 55

4.1.1 Introduction 55

4.1.2 Expected Utility Theory 56

4.1.3 Prospect Theory 56

4.1.4 Bayesian Decision Theory 60

4.1.5 Risk and Uncertainty 60

4.1.6 Making a Choice Out of a Set of Options 62

4.1.7 Impact of Affect and Emotion in the Process of Making a Choice between Alternatives 64

4.1.8 Influence of Regret and Disappointment on Decision-making 64

4.1.9 Impact of Intuition on Decision-making 65

4.1.10 Other Influences while Making Decisions 66

4.2 Making Decisions to Deal with Operational Safety 66

4.2.1 Introduction 66

4.2.2 Risk Treatment Option 1: Risk Reduction 67

4.2.3 Risk Treatment Option 2: Risk Acceptance 69

4.2.4 Risk Treatment 70

4.2.5 The “Human Aspect” of Making a Choice between Risk Treatment Alternatives 74

4.3 Safety Investment Decision-making – a Question of Costs and Benefits 76

4.3.1 Costs and Hypothetical Benefits 76

4.3.2 Prevention Benefits 78

4.3.3 Prevention Costs 78

4.4 The Degree of Safety and the Minimum Overall Cost Point 79

4.5 The Type I and Type II Accident Pyramids 83

4.6 Quick Calculation of Type I Accident Costs 85

4.6.1 Accident Metrics 86

4.6.2 A Quick Cost-estimation Approach for Type I Risks 87

4.7 Quick Calculation of Type II Accident Costs 88

4.7.1 Introduction to a Study on Type II Event Decision-making 88

4.7.2 Results of the Study on Type II Event Decision-making 90

4.7.3 Results by Gender 92

4.7.4 Rational and Intuitive Thinking Styles 92

4.7.5 Conclusions of the Study on Type II Event Decision-making 94

4.8 Costs and Benefits and the Different Types of Risk 95

4.9 Marginal Safety Utility and Decision-making 97

4.10 Risk Acceptability, Risk Criteria, and Risk Comparison – Moral Aspects and Value of (Un)safety and Value of Human Life 101

4.10.1 Risk Acceptability 101

4.10.2 Risk Criteria and Risk Comparison 104

4.10.3 Economic Optimization 110

4.10.4 Moral Aspects and Calculation of (Un)safety, Monetizing Risk and Value of Human Life 111

4.11 Safety Investment Decision-making for the Different Types of Risk 123

4.11.1 Safety Investment Decision-making in the Case of Type I Risks 123

4.11.2 Safety Investment Decision-making for Type II Risks 126

4.11.3 Calculation of the Disproportion Factor, taking Societal Acceptability of Risks into Account 130

4.12 Conclusions 142

References 142

5 Cost-Benefit Analysis 149

5.1 An Introduction to Cost-Benefit Analysis 149

5.2 Economic Concepts Related to Cost-Benefit Analyses 150

5.2.1 Opportunity Cost 150

5.2.2 Implicit Value of Safety 151

5.2.3 Consistency and Uniformity of Safety Investment Decisions 152

5.2.4 Decision Rule, Present Values, and Discount Rate 154

5.2.5 Different Cost-Benefit Ratios 157

5.3 Calculating Costs 158

5.3.1 Safety Measures 158

5.3.2 Costs of Safety Measures 158

5.4 Calculating Benefits (Avoided Accident Costs) 175

5.4.1 Distinction between Various Accident Costs 176

5.4.2 Avoided Accident Costs 178

5.4.3 Investment Analysis (Economic Concepts Related to Type I Risks) 200

5.5 The Cost of Carrying Out Cost-Benefit Analyses 201

5.6 Cost-Benefit Analysis for Type I Safety Investments 202

5.7 Cost-Benefit Analysis for Type II Safety Investments 202

5.7.1 Introduction 202

5.7.2 Quantitative Assessment Using the Disproportion Factor 204

5.7.3 Decision Model 206

5.7.4 Simulation on Illustrative Case Studies 208

5.7.5 Recommendations with Regard to Using the DF0 216

5.8 Advantages and Disadvantages of Analyses Based on Costs and Benefits 216

5.9 Conclusions 217

References 217

6 Cost-effectiveness Analysis 219

6.1 An Introduction to Cost-effectiveness Analysis 219

6.2 Cost-effectiveness Ratio 220

6.3 Cost-effectiveness Analysis Using Constraints 222

6.4 User-friendly Approach for Cost-effectiveness Analysis under Budget Constraint 223

6.4.1 Input Information 223

6.4.2 Approach Cost-effectiveness Working Procedure and Illustrative Example 225

6.4.3 Illustrative Example of the Cost-effectiveness Analysis with Safety Budget Constraint 226

6.4.4 Refinements of the Cost-effectiveness Approach 227

6.5 Cost-effectiveness Calculation Often Used in Industry 232

6.6 Cost–Utility Analysis 233

6.7 Conclusions 233

References 233

7 Beyond the State-of the Art of Operational Safety Economics: Bayesian Decision Theory 235

7.1 Introduction 235

7.2 Bayesian Decision Theory 237

7.2.1 The Criterion of Choice as a Degree of Freedom 237

7.2.2 The Proposed Criterion of Choice 240

7.2.3 The Algorithmic Steps of the Bayesian Decision Theory 241

7.3 The Allais Paradox 241

7.3.1 The Choosing of Option 1B 242

7.3.2 The Choosing of Option 2A 243

7.3.3 How to Resolve an Allais Paradox 245

7.4 The Ellsberg Paradox 245

7.5 The Difference in Riskiness Between Type I and Type II Events 247

7.5.1 Outcome Probability Distributions with Equal Expectation Values 247

7.5.2 The Risk of the Type I Event 248

7.5.3 The Risk of the Type II Event 249

7.5.4 Comparing the Risks of the Type I and Type II Events 250

7.6 Discussion 251

7.7 Conclusions 253

References 253

8 Making State-of-the-Art Economic Thinking Part of Safety Decision-making 254

8.1 The Decision-making Process for an Economic Analysis 254

8.2 Application of Cost-Benefit Analysis to Type I Risks 256

8.2.1 Safety Investment Option 1 257

8.2.2 Safety Investment Option 2 259

8.3 Decision Analysis Tree Approach 262

8.3.1 Scenario Thinking Approach 263

8.3.2 Cost Variable Approach 263

8.4 Safety Value Function Approach 267

8.5 Multi-attribute Utility Approach 270

8.6 The Borda Algorithm Approach 272

8.7 Bayesian Networks in Relation to Operational Safety Economics 274

8.7.1 Constructing a Bayesian Network 274

8.7.2 Modeling a Bayesian Network to Analyze Safety Investment Decisions 276

8.8 Limited Memory Influence Diagram (LIMID) Approach 280

8.9 Monte Carlo Simulation for Operational Safety Economics 284

8.10 Multi-criteria Analysis (MCA) in Relation to Operational Safety Economics 286

8.11 Game Theory Considerations in Relation to Operational Safety Economics 292

8.11.1 An Introduction to Game Theory 292

8.11.2 The Prisoner’s Dilemma Game 294

8.11.3 The Prisoner’s Dilemma Game Involving Many Players 295

8.12 Proving the Usefulness of a Disproportion Factor (DF) for Type II Risks: an Illustrative (Toy) Problem 297

8.12.1 The Problem of Choice 297

8.12.2 The Expected Outcome Theory Solution 298

8.12.3 The Expected Utility Solution 299

8.12.4 The Bayesian Decision Theory Solution 300

8.12.5 A Numerical Example Comparing Expected Outcome Theory, Expected Utility Theory, and Bayesian Decision Theory 302

8.12.6 Discussion of the Illustrative (Toy) Problem – Link with the Disproportion Factor 304

8.13 Decision Process for Carrying Out an Economic Analysis with Respect to Operational Safety 305

8.14 Conclusions 308

References 309

9 General Conclusions 310

Index 313

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