Risk Management and the Systems Approach
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Risk Management and the Systems Approach
Dr. Stephan Bieri (1)
management of risks is one of the great challenges of the 21st century.
The ever growing human, economic and environmental losses due to
natural and man-made disasters evidence the need for a systematic
approach to the management of risks. The present contribution outlines
the increasing complexity of every day life in general and of risk
management in particular, and its relation to systems analysis.
It is shown that a multi-disciplinary understanding of disaster
risk management is required. The recently established World Institute
for Disaster Risk Management (DRM), a network for applied research,
implementation and dissemination in the field of disaster risk management,
provides the framework for major contributions towards an integrated
risk management and a sustainable risk prevention culture.
risk management may be seen as a combination of traditional scientific
and technical know-how and an appropriate method of decision-taking.
There is a strong need for analysis, in theory and in practice,
especially bringing together different interactions between man,
nature, and society. Of course, there is always an important demand
for engineering skills or management know-how. But the main question
is not how to solve an isolated problem but how to control different
interdependent actions. Thinking in complex systems starts at this
me begin with some fundamental remarks on risk, uncertainty, and
the old days, the tools of farming, manufacture, business management,
and communication were simple. Breakdowns were frequent, but repairs
could be made without calling the plumber, the electrician, the
computer scientist - or the accountants and the investment advisers.
Today, the tools we use are complex, and breakdowns can be catastrophic,
with far reaching consequences. We must be constantly aware of
the likelihood of malfunctions and errors." P.L. Bernstein
Risk analysis and management
and uncertainty relate to situations where there is more than one
F. Knight (1921) first formally distinguished between risk and uncertainty:
We can identify the probability of each possible outcome.
Uncertainty: We can identify the outcome, but not the corresponding
category is the unknown risks, consisting of situations where we
neither are able to identify the possible outcome, nor, in consequence
thereof, the corresponding probabilities of occurrence.
in a project, in a program, or simply while pursuing a goal is a
measure of the inability to achieve the objectives within
cost, schedule, and the surrounding constraints. Risk can be defined
as the product of the probability of a defined circumstance occurring
and the consequence of the occurrence of said circumstance. From
this definition it can be seen that assuming risk may well lead
to both positive and negative outcomes.
Risk cannot be avoided as long as we do not know what the future
holds. Risks also continuously evolve and change. Assuming and managing
risk is the essence of any decision-making process. The proper management
of risks is one of the biggest challenges that co-operation has
to face today. Clearly, such a statement is as well valid for the
world of science and of politics.
management is a concept that may be implemented in various ways.
All good risk management approaches include the following characteristics:
There is a planned and documented risk management process.
b) The process is based on a prospective assessment.
c) The assessment is periodically reviewed in order to validate
the initial findings and to uncover new problem areas.
d) A defined set of evaluation criteria is applied in order to
cover all aspects of the process.
e) The on-going results of the risk management process are formally
activities of the World Institute for Disaster Risk Management (DRM)
should be based on this general framework, evolving from an abstract
level to concrete sets of problems.
we know, the word system has many meanings, several without theoretical
background. According to A. D. Hall (1962), a father of systems
engineering, I propose the following definition:
system is a set of objects with relationship between the objects
and their attributes.
are parts or components of a system, and attributes are properties
of these. In my eyes, the most important step in defining a system
is its relation towards environment (e.g. any social and natural
any system, the environment is the set of all objects outside
Linear Programming we try to confine the environment by a set of
constraints. In planning theory, different sets of such constraints
form scenarios. Formally, the attributes of the environment affect
the system, whose attributes are changed.
Risks occur if we cannot control the relations within this system
and if we don't know the impacts of changes in the environment.
Coherence is needed, assuming and managing risks is the essence
of the business decision-making process. One of the biggest challenges
facing corporations today is the proper management of financial
risk management should achieve a similar coherence in its specific
the risk of occurrence of natural and man-made disasters must be
included in the consideration of economic, social, and political
systems. All strategies to achieve better prevention or to limit
impacts must be placed in such a framework. No doubt, there are
a lot of useful ways repairing the world after damage. But
if we want to do more we have to go beyond.
DRM and the mitigation circle
are all too familiar with the recent natural disasters, such as
earthquakes, floods, storms, avalanches, landslides, and fires.
We want to create a network for applied research, implementation,
and dissemination in the field of disaster risk management. The
planned work should shift away from the post-disaster response towards
an integrated risk management and sustainable risk prevention culture.
Please note that the World Institute for Disaster Risk Management
(DRM) wants to launch a substantial effort in the field of prevention.
and recovery measures are very well organised in most countries
and we do not want to interfere with such established organisations.
I am well aware that a large stock of techniques and practices are
available. Yet I think that there is a lack on the prevention side,
including land-use planning, technical measures, insurance as well
as institutional conditions, e.g. competition policies.
Figure 1: DRM and the Mitigation Circle
main need is for the integration of sectoral results, the
modelling multidisciplinary systems and for implementation-oriented
approaches. Simulation can provide a better understanding. Such
a procedure goes along with today's scientific methodology. For
the last years, modelling and simulations were constantly growing
fields due to the progress in computer-based science. Integrated
risk management techniques are increasingly becoming a tool in the
day to day running of corporation. In my eyes, DRM should follow
Application of the systems approach
The starting point of an integral risk management concept is the
relation between hazard, vulnerability, risk and risk management.
The approach of the World Institute for Disaster Risk Management
(DRM) includes the systems approach (e.g. Wilhelm, 1999):
Figure 2: Systems Approach
model links together the elements risk analysis, vulnerability,
and risk assessment. It requires the development of tools
for an overall risk mitigation. The development of methods and measures
to support prevention and intervention activities such as monitoring,
registration, forecasting, early warning, decision-supporting tools
for frontline decisions becomes particularly important. The objective
is to move away from scientific Taylorism.
Efficient risk management requires a careful evaluation of the vulnerability
of the objects and of the systems at risk. Cost-benefit analyses
of prevention measures can only be performed on the basis of a quantitative
evaluation of possible damage to structures and entire systems.
Vulnerability is a concept still lacking clear scientific definition
and theory that allows precise quantification. This is especially
true of indirect damage costs, e.g. damage to society, loss of market
share due to destruction of production facilities, and of cost estimates
of damage to cultural heritage and to environmental systems.
Risk assessment consists of an enlarged method to understand
the potential effects of natural hazards on human activities and
on the environment. The main goal includes developing techniques
that allow the most appropriate allocation of available resources
in order to optimise the protection of a number of assets. This
is a classical economic question.
assessment is based on the study of natural hazards interacting
at different spatial and temporal levels, varying on the local,
regional, and international scale. Individual hazards and physical
processes have been studied individually. Today, this is the core
activity of a great number of research institutes. Therefore, DRM
supports the multidisciplinary understanding and integrated analyses
of different processes. From there innovation should come.
Following the systems approach and applying different sectoral research
results, a first project portfolio for DRM has been developed. Special
progress must be made in interdisciplinary co-operation.
Figure 3: Project Portfolio
work must be developed along two lines:
we need better understanding of the fundamental relations between
natural and man-made risks and the process of globalisation. I see
especially three important fields in that context:
a) interdependence between disaster and economic development,
b) interdependence between disaster and sustainability,
c) interdependence between disaster and resource allocation (especially
capital and technology).
we have to deal with principles of welfare theory, such as discussing
old fashioned criteria of interregional and intertemporal measures
of government. This leads us to the recent controversy of the so-called
precautionary principle (K. R. Foster, P. Vecchia, M. H. Rapacholi,
more problem-oriented line approaches institutional arrangements.
Different practices of tackling risks must be evaluated, namely
changing from regulation to financial markets, or changing from
competition policy to international co-operation. How far market
mechanism works properly? What about deficiencies of legal framework
and political force? Are international and supranational organisations
able to promote long-term strategies of risk prevention?
these questions bring us back to the welfare theory just mentioned.
The "new economy" assumes a high degree of absence of
excludability and absence of non-rivalry. In such context, we have
to find arrangements protecting social overhead capital (e.g. communication
infrastructure) and scarce natural resources.
am not convinced that social policies promoting externalisation
should be followed. After the Second World War German-speaking economists
used the term "Ordnungspolitik" for an efficient systems
approach of market economy. I very much believe that a robust framework
for markets with little direct regulation offers best conditions
for successful risk management of firms and individuals. So DRM
can point out ways to avoid unnecessary government intervention
will be a major reason for our direct collaboration with leading
firms in different industries. Specific targets of DRM will be not
only reinsurance, but also new financial products as well as specific
ways of developing public infrastructure. Cutting-edge risk management
of utilities or models of build-operate-transfer (BOT) include interesting
interfaces for DRM.
- Bernstein P.L., 1996. Against the gods, New York: J. Wiley &
- De Long J.B., Froomkin A. M., 1997. The next economy?, in: Hurley
D., Kahin B., Varian H. (eds.), Internet Publishing and Beyond:
The Economics of Digital Information and Intellectual Property,
Cambridge: MIT Press
- Embrechts P., Klueppelberg C., Mikosch T., 1997. Modelling external
events in insurance and finance, Berlin: Springer
- Foster K.R., Vecchia P., Rapacholi M.H., 2000. Science and the
precautionary principle, Science, vol. 286, pp 979-980
- Hall A.D., 1973 (1962). Some fundamental concepts of systems engineering,
in: Optner S.L. (ed.), Systems analysis, Harmondsworth: Penguin
- Knight F.H., 1964 (1921). Risk, uncertainty and profit, New York:
- Menheere S.C.M., Pollalis S.N., 1996. Build, operate, transfer,
Delft: University of Technology
- Wilhelm C., 1999. Kosten-Wirksamkeit von Lawinenschutz-Massnahmen
an Verkehrsachsen, Bern: Buwal
author wishes to thank the former member of the board of directors
DRM U. Bremi, the current co-director DRM Dr. J. Hammer, the former
program advisor DRM Dr. H. Neukomm, and M. Zumbühl.
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