RISK TOLERANCE

If we shunned risk, we would be locked down and lead uninteresting lives. If we ignored risk, we wouldn’t live long. Therefore, risk tolerance boils down to a tradeoff. We weigh the likelihoods and consequences against the price of mitigation using mostly unscientific preconceived notions. Dazzled by the glimmer of potential rewards, we tend to exhibit greater risk tolerance in our youth and grow more risk-adverse in older age, mostly as the result of experience.

When fire protection engineers and loss prevention consultants survey your facilities and assess risk for you, we usually measure with a generic risk tolerance yardstick. That yardstick is based on best industry practices and published industry standards written by organizations whose members have vested interests in protecting assets and infrastructure by preventing fires and mitigating damage in the event of fire. These include the National Fire Protection Association (NFPA), FM Global and American Petroleum Association (API) to name a few. Most requirements and recommendations in those published standards are the result of lessons learned. That said, your risk tolerance yardstick may differ from ours.

If everyone had the same low risk tolerance, all of our clients would follow all of our recommendations, all facilities within an industry group would have the same level of engineered risk mitigation and major fire losses would likely become unheard of. In the real world however, risk tolerance and mitigation preferences vary nearly as much by individuals, organizations, cities, states and countries as musical taste. In a number of instances, clients accepted my risk mitigation recommendations but didn’t think that they were effective enough, so they spent much more money on more complex solutions. In other cases, my proposed solutions were too expensive and clients spent less money on inadequate solutions which were not solutions at all. Different risk tolerance yardsticks are used on a larger scale as well: The focus of fire risk mitigation in the USA remains on engineered fire protection systems whereas European countries focus more on noncombustible construction and fire divisions.

What is Important?

Our personal risk tolerance is influenced by what happens to our family members, friends, neighbors and business associates. Regardless of the shape and length of different risk yardsticks, the importance is recognizing and understanding the boundaries of your risk tolerance and using these to make decisions concerning the best mitigations. A good way of gaging risk tolerance on the commercial level is to track near misses, use lessons learned and keep informed about fire losses happening in particular industries and their effects.

Upon presenting my findings and recommendations to an executive of a large California utility early in my career, the executive told me that the utility would not make risk reduction investments into their fleet of hydroelectric power plants because these plants were worth very little to the utility. That executive communicated his organization’s position clearly and I was baffled by that response. It made absolutely no sense from an engineering perspective but it helped me better understand the utility’s goals and offer a more valuable service by helping them channel their efforts and funds into assets that were important to them. Executives make business decisions and engineers rarely make good executives. Engineers make decisions based on scientific principles while business leaders make decisions based on payback.

Be Proactive

Ben Franklin coined the phrase: “an ounce of prevention is worth a pound of cure”. In other words, a nickel spent on fire prevention and protection is better than a dollar spent on fixing the aftermath. In another example, the business leaders of a major electric utility had made the firm decision to provide sprinkler protection on each and every coal conveyor belt at each and every power plant in the utility’s fleet. Their decision did not consider conveyor size, access or criticality to operations but was the result of an unfortunate fire with multiple fatalities on one of the utility’s non-protected conveyors. While that fire was still fresh on their minds, the utility’s business leaders were determined that such a tragedy would never happen again on their watch and they spared no expense in making sure that it didn’t. But why not prevent the tragedy at a lower cost in the first place? Undoubtedly, the utility’s executives had been warned prior to the fire about the risk of not having sprinkler protection on a coal conveyor and they decided to accept the risk. That turned out to be a bad decision and the knee-jerk reaction following the fire resulted in much higher costs than the utility would have incurred by providing sprinkler systems on key conveyors proactively.

A Rule of Thumb

I have seen cases similar to the preceding coal conveyor fire example over and over during my career. As the coal conveyor fire example shows, throwing a bunch of money at fire protection solutions after a fire loss is neither an effective nor economical strategy. It is a lose-lose strategy: Not only are those business leaders paying the price of mitigating risk too late, but they also paid the price of not mitigating it. I discovered a pattern from which I developed a very simple rule of thumb: If you would do it after the fire happens, you should do it now.

In other words, if after suffering the consequences of a fire, you would no longer accept the risk, then you are better off to keep the consequence from happening at the cost of mitigation. If on the contrary, you would accept the risk again after a fire, then accepting the risk before is probably reasonable.

Although more scientific tools are available for detailed risk-informed decision-making, it just does not get any simpler than the foregoing litmus test for a quick first-order assessment.

That’s Why We Have Insurance

Insurance is a financial tool for transferring risk to another entity at a cost. It is most effective and economical when used as an upper layer in risk management after all other reasonable mitigation measures have already been put in place. It is not an effective strategy for increasing risk tolerance. Insurance typically covers at least a portion of the physical repair costs, and may even cover some business interruption loss, but after a loss, a check from the insurance company is rarely a winning situation. The damages caused by fire, smoke and soot can be devastating to a company and the fallout from a fire incident often overshadows the actual fire damages with recovery sometimes taking years. Losses usually not covered by insurance include loss of market position, company demises and even ripple effects in the price of consumer goods.

Conclusion

Fire protection engineers and loss prevention consultants assess fire hazards, analyze consequences and likelihoods, and provide you with proven technical solutions. You can help us be more effective by clearly communicating your risk tolerances, just like the executive of the California utility did with me decades ago. Also, provide us with accurate values for buildings, contents and the effects that processes and equipment have on your operations. This results in better analyses which allow us to help business leaders make more informed risk decisions based on what is important to them and their organization.

The views expressed in this article are those of its author and in no way represent the positions and views of past, present and future employers, clients or affiliates. Any recommendations or conclusions in this article should not be interpreted as any guarantee that the reader will achieve the same results.