Everyone has different risk tolerance thresholds. We use the plural because each of us has various thresholds, for example, a perceived one and a financial one.
Risk and Risk Tolerance Thresholds Made Simple
Each of us, every day, decides to undertake some activities and consciously or unconsciously assumes risks we consider acceptable/tolerable or sometimes intolerable.
Think about various activities: hunting, fishing, driving, cooking.
They all have the potential for unpleasant consequences, for example, and respectively: encountering an aggressive bear, capsizing the boat, veering off the road, starting a fire.
Each activity has a certain level of probability of becoming an accident. Further, that accident may have a range of consequences. For instance, in the example of driving, there are risks including small accidents, "totaling" the vehicle, or even crashing into other vehicles in its trajectory.
We evaluate risk when we combine the probabilities of an accident with its consequences. We reach our tolerance threshold when we say: "I cannot accept that activity with that probability paired with those consequences."
Now, you may find a risk intolerable from a financial point of view, e.g., "I cannot afford to total my truck because I can’t pay for a replacement." Or you may find a risk intolerable from a perception point of view, e.g., "My spouse will kill me if I total the truck."
Operations Have Risks and Risk Tolerance Thresholds
Over the life of any operation, it is inevitable that some incidents will occur. Some will be benign; some might be more significant and evolve into accidents. Higher significance consequences will occur as a result of accidents.
Obviously, accidents of various types will happen during the service life of the operation. Indeed, zero risk is not achievable, not even in highly controlled industries like civil aviation, and certainly not in industrial operations.
So, as a manager of an operation, you should ask yourself:
- Are the risks tolerable and acceptable without mitigation?
- Are the risks tolerable and acceptable with mitigation?
- What are the residual risks if I mitigate risks?
- Is the proposed mitigation appropriate and sufficient?
To answer those questions, we have to select the operation's risk tolerance thresholds. Note that literature does not help to complete these endeavors, as public thresholds address generic “large-scale” societal tolerance concerns we discussed already in the past.
Risk tolerance thresholds are always project- and culture-specific. Therefore, we need to define specific thresholds by probing the perception and financial resilience of various stakeholders through appropriate questions.
In the example below, after asking those appropriate questions to the managers of a mining operation, we developed their reasonable negotiated acceptability threshold model. This model can be used to define which risks are tolerable, intolerable, manageable, and strategic in view of tactical and strategic planning of the operations.
Example of Risk Tolerance Thresholds
As shown in the figure below, we prepare a quantitative probability-consequences quadrant before plotting the various risks (i.e., probabilities and consequences pairs of various scenarios). It is paramount to prepare the tolerance beforehand to avoid biases, and it is even better to avoid showing any risk result until we plot them on the graph for the same reason.
The following lines/curves are depicted in color on the graph:
- Yellow depicts the operation's perceived risk tolerance threshold obtained through a facilitated process of Q/A, using the client’s answers and data.
- Orange is the so-called ISO-risk threshold or a line with identical risk tolerance for any probability. It is also based on the client’s data. It would correspond to a "soul-less" acceptance where there is no "shy-away" factor in front of even the highest consequences, provided their probabilities are very low.
- Purple is a benchmark obtained by reviewing historical performances in the industry. Anything above it is riskier than the worldwide portfolio of similar operations. Anything below is less risky than the portfolio.
- Burgundy defines the ALARP (as low as reasonably practicable) concept expressed in terms of Willingness To Pay (WTP), which is equivalent to 2.5MUS$).
The ALARP tolerance corresponds to the bottom axis (number of fatalities) but can also be read on the top consequence due to the equivalence of WTP = 2.5MUS$ adopted in this example. Note the vertical line is placed at one fatality in the graph.
Each line/curve is numbered from 1 to 7, which denotes the specific nature of the risks they may include.
Risk Tolerance Thresholds
Here is a list of the seven areas (1 to 7) with descriptions of their “properties”:
- Below ALARP (fatalities expressed in WTP) and tolerable.
- Tolerable for the considered mining operation and below the world benchmark.
- Tolerable for the considered mining operation but above the world benchmark.
- Corporately intolerable: high-probability, low-consequence scenarios that create “fatigue.” For example, having a piece of equipment that breaks down often but does not have any significant consequence. Despite the corresponding risks being lower than the constant risk curve, clients will often decide to replace the equipment, either because the impact is overestimated and/or due to the “fatigue” process. This is often voiced as: “That piece of equipment was a pain in the neck, so we changed it!”
- “False comfort,” a tendency to “play” because of overestimating tolerance.
- Iso-tolerable, corporately intolerable, ALARP intolerable.
- Entirely intolerable.
Examples of Risks in Different Areas of the Risk Tolerance Thresholds
- A haul truck accident (not a crash) would likely plot left of the vertical “one fatality” line. Thus, it would land in Areas 1, 2, or 3 depending on the level of training, road maintenance, truck maintenance, etc., as these influence the probability. Truck damages, if they are common, would land in Area 4.
- Accidents with significant financial consequences but remaining ALARP-compatible would land in Area 1. For instance, this could be the case of multi-bench failures where monitoring and alert systems allow personnel to evacuate the danger area in time.
- Area 2 would receive accidents that are fine with respect to the world benchmark and are corporately tolerable. Their expected fatality consequences make them H&S intolerable.
- Area 3 receives similar risks to those of Area 2 but with probabilities higher than the benchmark.
- A failure could plot in Areas 2, 3, 5, or 6 depending on:
- the number of people and pieces of equipment in the area (including access control to these areas),
- the business interruption it will generate, and
- extant mitigation and monitoring defenses.
Note that Area 6 also includes extremely high-consequence, extremely low-probability events.
A full collapse of a pit face would certainly fall in Area 7 if the probability is above the world benchmark and its cost of consequences is extremely high (e.g., no double access road).
Closing remarks
Contact us if you want to develop your own risk tolerance thresholds and use them to guide your decision-making and to establish mitigative road-maps.
