geohazards probabilities frequencies and insurance denial

Geohazards probabilities frequencies and insurance denial

In the anthropocene insurers are facing “new” challenges when insuring against Geohazards. That is true especially for those caused by Human activity. Indeed geohazards probabilities, frequencies and insurance denial constitute a bundle.

Insurers have realized that, because of the dynamic evolution, the usual actuarial point of view faces significant challenges and can be misleading. The indiscriminate use of Force Majeure and Insurance denial to protect themselves is actually detrimental to their business and their clients.

What an Epiphany! Looking only in the rear-view mirror while driving is indeed going to complicate the steering of the vehicle! Insurers have traditionally worked like that. In fact using past data (statistics) to evaluate their business opportunities, and they have already got their share of misery from climate changes and other events.

 Geohazards Caused by Human Activity fast-track evolution is typically an arena where using actuarial data and statistics can only be wrong and expose everyone, including the insurers, to enormous overexposures.

Unfortunately insurers have asked hazard specialist (Geologist, weather people) help in solving their conundrum. A mistake we oftentimes see occurring invarious business spaces.

Obviously, hazard specialists want to measure what they know, but they often confuse hazard with risks. By managing hazards instead of risks they end-up being ineffective or inefficient, effectively:

• squandering money,
• not getting results, or
• selecting unjustified insurance denial targets.

Risks, probabilities, frequencies and their relationship

Lets start by looking at concepts and values which are often encountered in the hazard-risk literature, but in a transparent and rational way. We will start with the “Act of God”, a term that entered in contract more than a century ago to indicate unforeseeable and unmanageable events like hurricanes, earthquakes, etc. and thus trigger the activation of Force Majeure clause.

The definition of an Act of God can be understood with an example. If we consider a commercial contract for a facility in Salt Lake city, one could have said that a tornado in Salt Lake city was an Act of God until one happened on August 11, 1999. That means there was scientific consensus that a tornado was not a credible, actually an “impossible” event in Salt Lake city. From that point on, a tornado in Salt Lake City became a rare, but credible event, hence should not be an Act of God anymore.

Extreme Weather Is Already Draining The Biggest U.S. Companies

Of course at this point terms such as “credible event” have to be clarified. Their definition intimately pairs with the limiting value of Force Majeure. We can also say that lack of preparation (contingency plans, maintenance, mitigation) for a credible event is a default, even a negligence.

Three “standard” levels of mitigation

In recent times “standardized levels of risk reduction” have appeared in various industrial spaces, like mining. At least three of these definitions are now in common use among analysts. These three levels of risk mitigation also represent a convenient way to elude explicit tackling of risk tolerance, especially when dealing with the delicate theme of human life. However we can also see these standardized levels of risk reduction as a definition of “state of the art” practice.

Anything below a pre-defined ALARA, ALARP, BACT level can be considered as “negligent”. NB: in recent years public opinion tends to consider negligent even mitigative levels above these limits. The result is  severe criticism even when corporations, governments do follow “reasonable mitigative behaviour”.

Here are the definitions of the three “standard” levels of mitigation:

• ALARA

  ALARA is an acronym for the phrase As Low as Reasonably Achievable (Wilson, A.C. & Crouch., E., Risk/Benefit Analysis; Ballinger Publishing Company, Massachusetts. 1982. pp. 92-93;). It most often applies in reference to chemical or radiation exposure levels. But one could use it for rockfalls, landslides along roads.

• ALARP

  ALARP stands for As Low as Reasonably Practicable, and is a term often used in safety-critical and high-integrity systems. The ALARP principle is that the residual risk shall be as low as reasonably practicable. For a risk to be ALARP it must meet one condition. It must be possible to demonstrate that the cost involved in reducing the risk further would be grossly disproportionate to the benefit gained. The ALARP principle arises from the fact that it would be possible to spend infinite time, effort and money attempting to reduce a risk to zero. It should not be understood as simply a quantitative measure of benefit against detriment. In fact it is more a best common practice of judgment of the balance of risk and societal benefit. One could use it for flood control, slope control, especially if impinging on critical infrastructures.

• BACT

  BACT (Best Available Control Technology) For example: an emission limitation based on the maximum degree of emission reduction (considering energy, environmental, and economic impacts) achievable through application of production processes and available methods, systems, and techniques. One can use the BACT concept on a case by case basis for major new or modified emissions sources in attainment areas. Indeed it applies to each regulated pollutant. One could use it for toxic dumps, tailings storage facilities.

Risks vs mitigations, BACT, ALARA,, ALARP

Closing remarks

No matter which mitigative level we adopt as “standard, non negligent, practice”, a fundamental step is to define against which event it is necessary to mitigate. For it is a “credible” event. Of course we also have to decide against which event, we humans, have to humble, as it is an Act of God.

Like for risk, the technical definition of credibility differs quite substantially from the “colloquial” definition. The Process Industry literature, and other industries where major accidents/events are a concern,  define a credible accident. Generally they define a credible accident as ‘the accident which is within the realm of possibility. That is, with a probability higher than 10^-6/yr and has a propensity to cause significant damage. That is at least one fatality. This concept comprises both probable damage caused by an accident and probability of its occurrence.

The threshold value of 10^-5 is a general consensus. They use it in seismic, geological and other sciences to define “maximum credible events”.
So we can assume, for the optimization of the Force Majeure clause, that events with a probability of occurrence of  1 in a million (10^-6), or less, belong to Acts of God.  Whereas events with a probability of 1 in hundred thousand (10^-5), or more are credible and more importantly, although rare, foreseeable.

Tagged with: Act of God, ALARA, ALARP, BACT, credible event, Force Majeure, frequencies, Geohazards, Societal risks probabilities

Category: Consequences, Mitigations, Probabilities, Risk management, Uncategorized