Advanced Case Studies in Risk Management

Markus Porthin Advanced Case Studies in Risk Management

Master's thesis submitted in partial fulfilment of the requirements for the degree of Master of Science in Technology Espoo, 2 August 2004 Supervisor: Professor Ahti Salo Instructor: Professor Ahti Salo

HELSINKI UNIVERSITY OF TECHNOLOGY

ABSTRACT OF MASTER'S THESIS

DEPARTMENT OF ENGINEERING PHYSICS AND MATHEMATICS

Author: Department: Major subject: Minor subject: Title:

Markus Porthin Department of Engineering Physics and Mathematics Systems and Operations Research Strategy and International Business Advanced Case Studies in Risk Management

Title in Swedish: Avancerade fallstudier i riskhantering

Chair:

Mat-2 Applied Mathematics

Supervisor:

Professor Ahti Salo

Instructor:

Professor Ahti Salo

Abstract:

The word risk is used to describe a situation that involves a possibility of something undesired to happen. The systematic process of identifying, evaluating and reducing risks is usually referred to as risk management (RM). The forerunner applications of modern RM emerge from the military, nuclear power production and finance from where the methods have subsequently spread to every field where significant unwanted uncertainties exist. Although risk is pervasive, the methods and their usage depend on the context. Therefore, the case method is a powerful tool in teaching RM.

This thesis presents four educational RM case studies compiled by the author. The studies are aimed to show graduate students how some central RM methods may be used in practice and give insight in the general principles of RM. The whole process from risk identification to evaluation of implemented solutions is described. To give a multifaceted view, the cases include risk situations from different fields: poultry production, electricity retailing, mining and pension insurance business. Also a comparative analysis of the cases is conducted, where causal relationships between different properties are identified. Using the insight learnt from the cases, general guidelines and structural outlines concerning risk management are suggested.

A comparative analysis of the cases highlight that the RM method selection does not only depend on the modelling properties of the phenomena and the type of loss, but also on the traditions in each field. Seemingly different fields dealing with mathematically similar phenomena could gain from interaction and exchanging of methods. Based on the type of available information, rough guidelines for when to use frequentist, Bayesian or expert elicitation methods in probability assessments is drawn. The precautionary principle should be practised in cases with significant incertitude, where a formal risk assessment cannot be conducted. The comparative analysis supports also the intuitive assumption that the extent of governmental RM through regulations depends on the ubiquity and influence of the risk. The case studies can be found at .

Number of pages: 57 Keywords: Risk Management, Case Study, Risk Measures, Comparative Analysis, Risk Management Process

Department fills

Approved:

Library code:

i

TEKNISKA H?GSKOLAN

SAMMANDRAG AV DIPLOMARBETE

AVDELNINGEN F?R TEKNISK FYSIK OCH MATEMATIK

Utf?rt av: Avdelning: Huvud?mne: Bi?mne: Arbetets namn:

Markus Porthin Avdelningen f?r teknisk fysik och matematik System- och operationsanalys F?retagsstrategi och internationell marknadsf?ring Avancerade fallstudier i riskhantering

Title in English: Advanced Case Studies in Risk Management

Professur:

Mat-2 Till?mpad matematik

?vervakare:

Professor Ahti Salo

Handledare:

Professor Ahti Salo

Sammandrag:

Ordet risk anv?nds f?r att beskriva en situation med m?jliga o?nskade f?ljder. Den systematiska processen som best?r av identifiering, evaluering och reducering av risker kallas vanligen f?r riskhantering. De f?rsta till?mpningarna av modern riskhantering h?rstammar fr?n arm?n, k?rnkraftsproduktionen och finansv?rlden varifr?n metoderna numera har spridit sig till alla omr?den var betydande o?nskad os?kerhet f?rekommer. Fast?n risker finns ?verallt, beror metodvalet och till?mpningarna p? sammanhanget. D?rf?r ?r fallstudier ett ypperligt s?tt att l?ra riskhantering.

Detta diplomarbete presenterar fyra undervisningsfallstudier sammansatta av skribenten. Syftet var att visa f?r universitetsstuderande, hur vissa centrala riskhanteringsmetoder kan anv?ndas i praktiken samt ge en inblick i riskhanteringens allm?nna principer. Hela processen fr?n riskidentifiering till utv?rdering av implementerade tillv?gag?ngss?tt beskrivs. F?r att ge en m?ngsidig syn, behandlas exempel fr?n olika omr?den: h?nsproduktion, ?terf?rs?ljning av elektricitet, gruvverksamhet och pensionsf?rs?kring. En j?mf?rande analys av exemplen utf?rs, var kausalf?rh?llanden mellan olika egenskaper identifieras. Utg?ende fr?n exemplen f?resl?s riktlinjer och grunddrag f?r riskhantering.

En j?mf?rande analys av fallstudierna visar att valet av riskhanteringsmetod inte enbart beror p? fenomenets egenskaper och f?rlusttyp utan ocks? p? traditionerna inom branschen. Till synes olika omr?den, som handskas med matematiskt sett liknande fenomen, kunde dra nytta av v?xelverkan och utbyte av metoder. Utg?ende fr?n typen av tillg?nglig information, dras grova riktlinjer f?r till?mpandet av frekvens-, Bayes- och expertelicitationsmetoder f?r best?mmandet av sannolikheter. I fall med betydande oklarhet kan en formell riskbed?mning inte utf?ras, utan d? b?r f?rsiktighetsprincipen till?mpas. Den j?mf?rande analysen st?der ?ven det intuitiva antagandet, att graden av statlig riskhantering genom reglering beror p? riskens utbredning och influensgrupper. Fallstudierna finns p? WWW-sidan .

Sidoantal:

57

analys, riskhanteringsprocess

Ifylles p? avdelningen

Godk?nd:

Nyckelord: riskhantering, fallstudie, riskm?tt, j?mf?rande Bibliotek:

ii

Preface

This work was carried out at the Systems Analysis Laboratory at Helsinki University of Technology. I thank Professor Ahti Salo, my instructor and supervisor, for guidance and invaluable feedback throughout the writing of this thesis. I am also grateful to Research Professor Urho Pulkkinen at VTT Technical Research Centre of Finland, who put his expertise on risk analysis at my disposal. I thank the whole personnel at the Systems Analysis Laboratory for a great working atmosphere. I thank Ph.D. Jukka Ranta and Professor Riitta Maijala at the National Veterinary and Food Research Institute for sharing their time and giving me further insight in the National Salmonella Control Programme. Most of all, I wish to thank my fianc?e Elina Karp, who helped me in many ways. Discussions with her cleared up my thoughts during the writing and she kindly proofread the thesis. I am grateful for her love and support as well as patience and understanding although the final revisions of the manuscript took time from our wedding preparations.

Helsinki, 2 August 2004.

Markus Porthin

iii

Table of Contents

Preface.............................................................................................................................................iii 1 Introduction ...........................................................................................................................1

1.1 Background .................................................................................................................. 1 1.2 Objectives of the Thesis............................................................................................. 2 1.3 The Case Method in Teaching Risk Management ................................................. 2 1.4 Structure of the Study................................................................................................. 4 2 Risk..........................................................................................................................................5 2.1 Definitions of Risk...................................................................................................... 5 2.2 Risk Measures .............................................................................................................. 6

2.2.1 Qualitative measures.......................................................................................... 6 2.2.2 Quantitative measures ....................................................................................... 7 2.3 Risk Analysis and Risk Management...................................................................... 10 2.4 Risk Management in Different Fields .................................................................... 13 2.4.1 Finance .............................................................................................................. 13 2.4.2 Process Industry............................................................................................... 13 2.4.3 Insurance ........................................................................................................... 14 2.4.4 Society and Foresight ...................................................................................... 14 2.4.5 Environment and Health ................................................................................ 14 3 Case Studies......................................................................................................................... 16 3.1 Salmonella Case......................................................................................................... 17 3.1.1 Background....................................................................................................... 17 3.1.2 Risk Assessment Model .................................................................................. 19 3.1.3 Risk Management Process .............................................................................. 20 3.1.4 Lessons from the Case .................................................................................... 22 3.2 Electricity Retailer Case............................................................................................ 23 3.2.1 Background....................................................................................................... 23 3.2.2 Value Tree Framework.................................................................................... 24 3.2.3 Risk Management Process .............................................................................. 26 3.2.4 Lessons from the Case .................................................................................... 27 3.3 Mining Case ............................................................................................................... 28 3.3.1 Background....................................................................................................... 28 3.3.2 Safety Assessment of Air Recirculation System .......................................... 29 3.3.3 Risk Management Process .............................................................................. 31 3.3.4 Lessons from the Case .................................................................................... 33 3.4 Pension Insurance Case ........................................................................................... 34 3.4.1 Background....................................................................................................... 34 3.4.2 Main Risks of a Pension Insurance Company ............................................. 35 3.4.3 Stochastic Programming Model for Asset Liability Management ............ 37

iv

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download