Risk management, more than calculating the value of human lives

04 December 2019

In the risk management profession, we are used to calculating probabilities, risks and damage. We know that risk is probability times effect. In some of those calculations, the value of a human life, implicitly or explicitly, emerges. I discovered that at some point, the National Highway Traffic Safety Administration (NHTSA) set that value at 200,000 dollars. How should we estimate the value of a human life? And how do we deal with that in our risk practices?

The probability of an accident. The damage if it happens. The investment that helps prevents misery. These are daily practices for risk managers at companies and insurers. Those calculations can be incredibly tough. Consider Boeing, for example, that has to deal with the fact that the Boeing 737 MAX has been grounded for some time due to malfunctions. The aircraft builder has taken measures and wants a green light, because planes that don’t fly are expensive. Aircraft of this type have since been modified; they are supposedly safe to fly again. But how safe? And what is safe enough – is that when the chance of an accident is a million to one? The two crashes with this type of aircraft have cost 346 human lives. What if the probability calculations state that such an accident only occurs once every five years? Is that good enough or should it be once every ten years?

The American car manufacturer Ford tackled that in very practical way in the distant past. To make the Ford Pinto more energy-efficient and competitive, the developers wanted to scrap every superfluous part, every extra gram of weight. They ‘saved’ on the fuel tank protection for the model and it was justified through an arithmetic exercise.

They used statistical data to calculate any potential increase in the risk of explosion this created with rear-end collisions. The car could burst into flames, potentially causing physical injury or even death – and payable compensation for damages – as a result. Ford assessed the risk of accidents, the cost of the damage and the amount of the potential compensation per injury and death. The savings per car ($11 for the protection) times the number of cars for sale were compared to the (statistically estimated) 180 deaths times $200,000, 180 injuries times $67,000 and an X amount on vehicle damage. To make a long story short, the expected damage was lower than the cost of the fuel tank protection. That calculation can never be completely watertight; assumptions were made and some estimates were subjective. What’s more, this didn’t work out well for Ford at the time.

Comparable considerations are weighed in other contexts too, consider fire safety in buildings. In essence, it’s the same issue. You know you can take preventative measures to prevent fire. Using fire-resistant walls and doors decreases the chance of a fire spreading, and a sprinkler system can keep the fire under control or extinguish it. But zero risk does not exist. And with that, we implicitly keep in mind the probability of losing human lives. How much exactly, that’s a matter of calculation.

A factor is also how authorities grant permits to companies. If a chemical company applies for a permit, they have to demonstrate through accepted analysis methodology  that the probability of causing damage to third parties is less than one in a million. It is a complex issue that is largely about the failure rates of all kinds of components, such as valves, control valves and other things often based on statistics. But implicitly you don’t only consider the damage to buildings and the property of third parties, but also injuries or deaths of, for example, staff and local residents. If you are doing it right – the probability of accidents, damage and victims is less than one in a million – then you will get your permit. There are no guarantees, but such a probability is seemingly acceptable.

"There is more at play than simply the power of cold hard figures. A sense of social responsibility and reputation are just two of the reasons to look further than only at the failure rates and risks."

Gerrit Vink
Senior Consultant Riskonet

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The dilemma also plays out in the medical world, for example with the question of how much expensive medication or how many operations a doctor should ‘invest’ in someone who is incurably sick. When is investing more in a human life no longer responsible from an economical point of view?

These are questions that are not easy to answer from an ethical standpoint, quite simply, people have their own ideas. Beyond requirements and guidelines there is always a grey area open for interpretation. It is therefore hard to determine whether Boeing should have grounded its MAX aircraft sooner. And it is probably even harder to determine when the green light should be given.

Beyond the probability calculations, an aircraft builder is also affected by the factor of reputational damage. Any new accidents with the MAX could damage travellers’ confidence in the Boeing brand to such a degree that airlines make other purchasing choices. That could jeopardise the continuity of the company.

So, there is more at play than simply the power of cold hard figures. A sense of social responsibility and reputation are just two of the reasons to look further than only at the failure rates and risks. Damage factors that are less easily quantified should be included in the consideration. As such, a retail chain that puts all possible efforts into the safety of staff and the shopping public could decide to invest more in personal safety in their shops than is strictly required according to the permit.

That type of choice fits right in with the approach we represent at Riskonet. The integral view of what we call ‘mastering the unexpected’, is crucial for a well-substantiated, considered choice. We are more than happy to help with clarifying the risks and with the choices that need to be made on that basis. I, therefore, focus my advice on everyone who is busy assessing risks and who has a chance of ending up in situations similar to Ford or Boeing: it can never only be about the ultimate financial calculations concerning human lives. Look at the big picture as far as possible and make conscious choices that, if needed, go further than the financial limits appear to dictate, further than the law and what the insurers ask of you. Also take a look at your social and ethical compass.

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