The Language of ‘Risk’
One of the interesting points to come out of the recent R2A event and discussions with colleagues afterwards, is the confusion regarding the meaning of the word ‘risk’. There was a general perception that much of the SFAIRP – ALARP debate was confusion of terms rather than concepts, a proposition with which we at R2A concur. This also flowed onto a general observation about the way in which courts interpret various terms, especially the meaning of ‘likely’.
One of the interesting points to come out of the recent R2A event and discussions with colleagues afterwards, is the confusion regarding the meaning of the word ‘risk’. There was a general perception that much of the SFAIRP – ALARP debate was confusion of terms rather than concepts, a proposition with which we at R2A concur. This also flowed onto a general observation about the way in which courts interpret various terms, especially the meaning of ‘likely’.The meanings ‘risk’ with which R2A is familiar are:
i. A noun, especially as used in the insurance world, as in the insured ‘risk’.
ii. Risk as a property of an activity or a process involving both likelihood and consequence – an adjective. That is, it was a ‘risky’ investment. This can extend to a quantified ‘scientific’ approach to risk.
iii. Risk as a likelihood only, as in, the ‘risk’ of the hazard occurring.
iv. Risk as a concept involving future uncertainty, good and/or bad, as part of the human condition.
v. Risk as the antonym of reward, often used in financial terms to describe an element of net outcome as in ‘risk vs the reward’.
With regard to what’s ‘likely’, one of our colleagues, Tony Enright has noted that in NZ case law, the word “likely’ in the context of the Building Act 1991 (now Building Act 2004) is as follows:
“Likely” does not mean “probable”, as that puts the test too high. On the other hand, a mere possibility is not enough. What is required is “a reasonable consequence or [something which] could well happen”. Auckland CC v Weldon Properties Ltd 7/8/96, Judge Boshier, DC Auckland NP2627/95, [1996] DCR 635
‘Likely’, as used in [s 64(1)(a) BA91, now s 121(a)], means that there is a reasonable probability (see Dowling v South Canterbury Electric Power Board [1966] NZLR 676, 678); or that having regard to the circumstances of the case it could well happen (see Browne v Partridge [1992] 1 NZLR 220, 226). Rotorua DC v Rua Developments Ltd 17/12/99, Judge McGuire, DC Rotorua NP1327/97
The point of all this is that it’s courageous to assume that the courts will agree with your definitions post event. The prudent course is to use the courts meanings pre-event to ensure everyone is talking about the same thing in the same way, if it ever becomes necessary.
What has Risk Management become?
The meaning of the word risk has changed substantially over the last 20 years or so. It used to refer to potentially catastrophic events for which insurance was normally purchased, a meaning, which is still used by the Factory Mutuals and Lloyds underwriters.
In more recent times it has become associated with the term management, which has morphed it from the consideration of potentially catastrophic events to a process, which determines the optimum risk (upside and downside) outcomes, epitomised by the concept of risk appetite.
The courts have never experienced this confusion. After all, they do not care how often something has gone well, they only examine the instances where it all went terribly wrong. And to deal with these, the courts use the legal concept of due diligence.
The meaning of the word risk has changed substantially over the last 20 years or so. It used to refer to potentially catastrophic events for which insurance was normally purchased, a meaning, which is still used by the Factory Mutuals and Lloyds underwriters.
In more recent times it has become associated with the term management, which has morphed it from the consideration of potentially catastrophic events to a process, which determines the optimum risk (upside and downside) outcomes, epitomised by the concept of risk appetite.
The courts have never experienced this confusion. After all, they do not care how often something has gone well, they only examine the instances where it all went terribly wrong. And to deal with these, the courts use the legal concept of due diligence.
The risk management standard has probably been responsible for this confusion. This may not be a bad thing in itself, provided the new meaning of risk management is understood. From an engineering perspective it means that risk management has come to mean reliability management, (what is the most likely desirable outcome and what needs to be tweaked to ensure that this becomes the case) whilst the former, catastrophic meaning requires due diligence which is aimed at detecting the outlier events and their various, unlikely combinations.
For example, the extensive use of Monte Carlo simulations is another result of the new meaning. These are typically used to determine likely risk outcomes from independent probability event distributions. It will almost certainly reveal the most likely events to derail or enhance a business plan or project, but the simulations are unlikely to reveal the convergence of low probability, statistical outlier events, the combination of which creates perfect storms like the GFC (global financial crisis).
This may be why the various risk management societies have had difficulty in determining what their core business is in recent times. It also explains why it was so necessary for R2A to change its name (but not its business) from risk engineers to due diligence engineers. And why R2A’s operations due diligence model is so important. It tests for the catastrophic, low likelihood outliers (the old risk management) before it optimises for operational availability (the new risk management).