Beruflich Dokumente
Kultur Dokumente
Abstract
Accident databases (NRC, RMP, and others) contain records of incidents (e.g., releases and spills) that have occurred in the USA
chemical plants during recent years. For various chemical industries, [Kleindorfer, P. R., Belke, J. C., Elliott, M. R., Lee, K., Lowe,
R. A., & Feldman, H. I. (2003). Accident epidemiology and the US chemical industry: Accident history and worst-case data from
RMP*Info. Risk Analysis, 23(5), 865–881.] summarize the accident frequencies and severities in the RMP*Info database. Also, [Anand,
S., Keren, N., Tretter, M. J., Wang, Y., O’Connor, T. M., & Mannan, M. S. (2006). Harnessing data mining to explore incident
databases. Journal of Hazardous Material, 130, 33–41.] use data mining to analyze the NRC database for Harris County, Texas.
Classical statistical approaches are ineffective for low frequency, high consequence events because of their rarity. Given this
information limitation, this paper uses Bayesian theory to forecast incident frequencies, their relevant causes, equipment involved, and
their consequences, in specific chemical plants. Systematic analyses of the databases also help to avoid future accidents, thereby reducing
the risk.
More specifically, this paper presents dynamic analyses of incidents in the NRC database. The NRC database is exploited to model the
rate of occurrence of incidents in various chemical and petrochemical companies using Bayesian theory. Probability density distributions
are formulated for their causes (e.g., equipment failures, operator errors, etc.), and associated equipment items utilized within a
particular industry. Bayesian techniques provide posterior estimates of the cause and equipment-failure probabilities. Cross-validation
techniques are used for checking the modeling, validation, and prediction accuracies. Differences in the plant- and chemical-specific
predictions with the overall predictions are demonstrated. Furthermore, extreme value theory is used for consequence modeling of rare
events by formulating distributions for events over a threshold value. Finally, the fast-Fourier transform is used to estimate the capital at
risk within an industry utilizing the frequency and loss-severity distributions.
r 2006 Elsevier Ltd. All rights reserved.
Keywords: Risk; Frequency modeling; Consequence modeling; Abnormal events; Chemical plants
Abbreviations: Companies A, B, C, D, E, F, G—A, B, C, D, E, F, G; Basic indicator approach, BIA; Capital at risk, CaR; Center for Chemical Process
Safety (AIChE), CCPS; Equipment failure, EF; Environmental Protection Agency, EPA; Extreme value theory, EVT; Fast-Fourier transform, FFT; Heat
transfer units, HT; Identically and independently distributed, iid; Inverse fast-Fourier transform, IFFT; Internal measurement approach, IMA; Loss
distribution approach, LDA; Markov-chain Monte Carlo, MCMC; Major Accident Reporting System, MARS; National Response Center, NRC; Others,
O; Operator error, OE; Occupational Safety and Health Administration, OSHA; Process Safety Incident Database, PSID; Process safety management,
PSM; Process units, PU; Process vessels, PV; Quantile-quantile, Q-Q; Risk Management Plan, RMP; Standardized approach, SA; Storage vessel, SV;
Transfer line, TL
Corresponding author. Tel.: +1 215 898 7953.
E-mail address: seider@seas.upenn.edu (W.D. Seider).
0950-4230/$ - see front matter r 2006 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jlp.2006.10.003
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114 A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127
Model frequency distribution of the Failure probability analysis of the causes and
incidents using a Gamma-Poisson equipment types involved in the incident
Bayesian model using a Beta-Bernoulli Bayesian model
extreme and unusually rare events, which characterize Negative Binomial distribution, when the variance exceeds the
incidents reported in the chemical industries, are modeled mean (Bradlow, Hardie, & Fader, 2002).
effectively. Note that EVT has been applied in structural,
aerospace, ocean, and hydraulic engineering (Embrechts,
Kluppelberg, & Mikosch, 1997). Herein, EVT is introduced 2.1. Poisson distribution
to measure the operational risk in the chemical industries.
Finally, the operational risk of the individual chemical The annual number of occurrences of an incident is a
industries is computed by performing fast-Fourier trans- non-negative, integer-valued outcome that can be esti-
forms (FFT) of the product of the frequency and loss- mated using the Poisson distribution for y:
severity distributions to obtain the total loss distribution yi l
l e
and the capital at risk (CaR). This approach to measuring ypðy ¼ yi Þ ¼ ; yi 2 fI 1 g; yi X0; l40; (1a)
yi !
risks in specific companies provides a quantitative frame-
work for decision-making at higher levels. Using the where yi is the number of incidents in year i, and l is the
platform provided, the chemical industries should be annual average number of incidents, with the expected
encouraged to collect accident precursor data more value, E(y), and variance, V(y), equal to l. Due to
regularly. Through implementation of this dynamic risk uncertainty, the prior distribution for l is assumed to
assessment methodology, improved risk management follow a Gamma-distribution, lg(a, b):
strategies should result. Also, the handling of third party
investigations should be simplified after accidents. pðlÞ / la1 ebl ; a40; b40: (1b)
To begin the detailed presentation of this algorithm, From Baye’s theorem, the posterior distribution, p(l|Data), is:
Section 2 describes the concepts of Bayesian theory for
prediction of the numbers of incidents annually. Then, the pðljDataÞ / lðDatajlÞpðlÞ
NRC database, the Bayesian predictive models, and the loss- / ðls eN t l Þðla1 ebl Þ / lðaþsÞ1 eðbþN t Þl , ð1cÞ
severity distribution using EVT, are described in Section 3. PN t
The CaR calculations using FFTs are discussed in Section 4. where Data ¼ (y0, y1,y, yN t ), s ¼ i¼0 yi , Nt is the number
Finally, conclusions are presented in Section 5. of years, and l(Data|l) is the Poisson likelihood distribu-
tion. Note that p(l|Data) is also a Gamma distribution,
2. Modeling the frequency of incidents Gamma(a+s, b+Nt), because l is distributed according to
Gamma(a, b), which is a conjugate prior to the Poisson
Bayesian theory is helpful in formulating the annual distribution. The mean of the posterior distribution is the
frequency of occurrence of incidents for a company. The weighted average of the means of the prior and likelihood
relationship between the mean and the variance of the annual distributions:
incidents, over many years, determines the best choice of
aþs b a Nt s
distribution. For example, the Poisson distribution is suitable ¼ þ ; (1d)
b þ Nt b þ Nt b b þ Nt Nt
when the mean and the variance of the data are in close
proximity. When the predictions of the Poisson distribution and the variance of the posterior distribution is (a+s)/
are poor, other distributions are used; for instance, the (b+Nt)2.
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The predictive distribution to estimate the number of For a good model, the mean and standard deviation of
incidents in the next year, yN t þ1 , conditional on the z ¼ (z0,y,zN t ) should approach zero and one, respectively.
observed Data, is discussed by Meel and Seider (2006).
This gives a predictive mean, (a+s)/(b+Nt), and predictive 3. Analysis of the NRC database
variance, (a+s)/(b+Nt)[1+1/(b+Nt)], and consequently,
the posterior and predictive means are the same, while the The NRC database contains reports on the oil, chemical,
predictive variance exceeds the posterior variance. radiological, biological, and etiological discharges into the
environment in the USA and its territories (NRC, 1990).
2.2. Negative Binomial distribution A typical incident report includes the date of the incident,
the chemical involved, the cause of the incident, the
The annual number of occurrences of an incident is a equipment involved, the volume of the chemical release,
non-negative, integer-valued outcome that can be estimated and the extent of the consequences. Herein, the incidents
using the Negative Binomial distribution for y: reported for Harris County, Texas, for seven specific
facilities during the years 1990–2002, are analyzed
yðqÞm ð1 qÞyi yi 2 fI 1 g; yi X0; m40; qX0; (1e) to determine their frequencies and consequences (loss-
where yi is the number of incidents in year i, and m(1q)/q severities). This dataset was obtained from the Mary Kay
is the expected annual (mean) number of incidents, E(y), Safety Center at TAMU, which filtered the NRC database
and m(1q)/q2 is the expected variance, V(y). Due to for Harris County, taking care to eliminate duplications of
uncertainty, the prior distribution for m is assumed to incidents when they occurred. More specifically, the filtered
follow a Gamma distribution, mGamma(a, b): dataset by Anand et al. (2006), comprised of 7265 records,
is used for further processing.
pðmÞ / ma1 ebm ; a40; b40, (1f) The equipment is classified into 13 major categories:
electrical equipment (E1), pumps/compressors (E2), flare
and that for q is assumed to follow a Beta distribution,
stacks (E3), heat-transfer equipment (E4), hoses (flexible
qBeta(a, b):
pipes) (E5), process units (E6), process vessels (PV) (E7),
pðqÞ / qa1 ð1 qÞb1 ; a40; b40. (1g) separation equipment (E8), storage vessels (E9), pipes and
fittings (E10), unclassified equipment (E11), relief equipment
From Baye’s theorem, the posterior distribution, p(m,q|
(E12), and unknowns (E13). The Harris County database
Data), is
includes several causes of the incidents, including equip-
pðm; qjDataÞ / lðDatajm; qÞpðmÞpðqÞ ment failures (EF), operator errors (OE), unknown causes
(U), dumping (intentional and illegal deposition of material
/ qnm ð1 qÞs ðma1 ebm Þqa1 ð1 qÞb1
on the ground), and others, with the EF and OE causes
/ qnmþa1 ð1 qÞsþb1 ðma1 ebm Þ, being the most significant. Herein, the unknown causes
ð1hÞ (U), dumping, and others are combined and referred to as
PN t others (O).
where Data ¼ (y0, y1,y, yN t ), s ¼ i¼0 yi , Nt is the number
of years, and l(Data|m,q) is the Negative Binomial like- 3.1. Prediction of incidents at chemical companies
lihood distribution. The marginal posterior distributions,
p(m|Data) and p(q|Data), and the posterior means E(m|Data) Table 1 shows the number of incidents extracted from
and E(q|Data) are obtained using the Markov Chain the NRC database for the seven companies. The total
Monte-Carlo (MCMC) method in the WINBUGS soft- number of incidents, Ntotal, and the number of incidents of
ware (Spiegelhalter et al., 2003). These added calculations equipment failures, NEF, operator errors, NOE, and due to
are not needed for the Poisson distribution, in which unknown causes, NU, are listed during the years
the expected value, E(l|Data), is computed easily using 1990–2002. In addition, from the 13 equipment categories,
Eq. (1d). the number of incidents of process units, NPU, storage
vessels, NSV, compressors/pumps, NC/P, heat-transfer
2.3. Model-checking equipment, NHT, and transfer-line equipment, NTL, are
included. Note that the large excess of EF compared with
To check the accuracy of the model, the number of the numbers of OE was unanticipated. Perhaps this is due
incidents in year i, yi, is removed, leaving the data, to cost-saving measures that have reduced maintenance
yi ¼ (y0,y, yi1, yi+1,y,yN t ), over Nt1 years. Then, a budgets, with major repairs postponed until they are
Bayesian model applied to yi is used to predict yi. Finally, deemed to be urgent. Also, because automated equipment
yi and E[yi|yi] are compared, and predictive z-scores are often experiences fewer failures than those related to the
used to measure their proximity: inconsistencies of the operators, it is likely that many
reported EF are indirectly a result of OE.
yi E½yi jyi
zi ¼ p ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi . (2) For each of the seven companies, the numbers of
V ½yi jyi incidents were predicted for future years utilizing data
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118 A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127
Table 1
Number of incidents for seven companies in the NRC database
Companies Type Ntotal NEF NOE NU NPU NSV NC/P NHT NTL
a b
Company B Company F
80 14
70 12
Number of incidents
Number of incidents
60 10
50
8
40
6
30
20 4
10 2
0 0
1 3 5 7 9 11 1 3 5 7 9 11
Year (1991-2002) Year (1991-2002)
No. of incidents Predicted no. of incidents
from previous years. Included are the total number of However, for company F, the numbers of incidents are close
incidents, Ntotal, the number of incidents associated with to or less than those predicted.
each equipment type, and the number of incidents When examining the results for the seven companies, the
associated with each cause. In the remainder of this sizable variations in the number of incidents observed in a
section, selected results are presented and discussed. particular year are attributed to several factors including
Figs. 2(a) and (b) show the predictions of the number of management and planning efforts to control the incidents, it
incidents for companies B and F using Poisson distribu- being assumed that no significant differences occurred to
tions which are chosen arbitrarily to illustrate the varia- affect the reporting of the incidents from 1990 to 2002—
tions in the predictive power of the models. In these figures, although OSHA’s PSM standard and EPA’s RMP rule were
the number of incidents for the year n are forecasted using introduced in 1992 and 1996, respectively. Therefore, when
the Gamma-Poisson Bayesian techniques based on the the number of incidents is less than those predicted, it seems
number of incidents from 1990 to n1, where n ¼ 1991, clear that good incident-control strategies were implemented
1992, y, 2002. These are compared to the number of within the company. Similarly, when the number of
incidents that occurred in year n for companies B and F, incidents is higher than those predicted, the precursor data
respectively. yields a warning to consider enhancing the measures to
In the absence of information to model the prior reduce the number of incidents in the future.
distribution for the year 1990, a and b are assumed to be A good agreement between the numbers of incidents
0.001, providing a relatively flat distribution in the region of predicted and observed indicates that a stable equilibrium is
interest; that is, a non-informative prior distribution. Note achieved with respect to the predictive power of the model.
that information upon which to base the prior parameters Such a state is achieved when the numbers of incidents and
would enhance the early predictions of the models. This has their causes do not change significantly from year-to-year.
been illustrated for a Beta-Bernoulli Bayesian model, using Note, however, that even as stable equilibrium is ap-
informative and non-informative prior distributions, show- proached, efforts to reduce the number of incidents should
ing the sensitivity of the predictions to the prior values (Meel continue. This is because, even when successful measures are
& Seider, 2006). For company B, using non-informative taken year after year (that reduce the number of incidents),
prior distributions, either the numbers of incidents are close the predictive values are usually conservative, lagging
to the predicted numbers or higher than those predicted. behind until the incidence rates converge over a few years.
ARTICLE IN PRESS
A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127 119
Next, the results of the Bayesian model checking using the B (between 25 and 65) than at company F (between 0
R software package (Gentleman et al., 2005) to compute and 15). Note that the circles on the Q–Q plot in Fig. 4(b)
predictive distributions are presented in quantile–quantile depart more significantly from the straight line, possibly
(Q–Q) plots. For company F, Fig. 3(a) shows the density due to the larger year-to-year variation in the number of
profile of incidents, while Fig. 3(b) shows the normal Q–Q incidents as well as the appropriateness of the Gamma-
plot, which compares the distribution of z (Eq. (2)) to the Poisson distribution. The circles below the straight line
normal distribution (represented by the straight line), where correspond to the safe situation where the number of
the elements of z are represented by circles. The sample incidents is less than that predicted. However, the circles
quantiles of z (ordered values of z, where the elements, zi, are above the straight line, with the number of incidents higher
called quantiles) are close to the theoretical quantiles than those predicted, provide a warning.
(equally-spaced data from a normal distribution), confirm- The predictions in Fig. 4(b) are improved by using a
ing the accuracy of the model predictions. Most of the Negative Binomial likelihood distribution with Gamma
values are in good agreement, except for two outliers at the and Beta prior distributions. The prior distribution for
theoretical quantiles, 1.0 and 1.5. 1990 is obtained using a ¼ b ¼ 0.001, and a ¼ b ¼ 1.0,
Figs. 4(a) and (b) show the density profile of incidents providing a relatively flat distribution in the region of
and the Q–Q plot for company B. Comparing Figs. 4(a) interest; that is, a non-informative prior distribution. The
and 3(a), the number of incidents at company B is much Negative Binomial distribution provides better agreement
higher than at company F. In addition, the variation in the for company B, while the Poisson distribution is preferred
number of incidents in different years is higher at company for company F.
0.15
2
Sample quantiles
0.10 1
Density
0
0.05
-1
0.00
5 10 15 20 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Number of incidents Theoretical quantiles
a b
Normal Q-Q Plot
0.06 6
Poisson
0.05 4 Negative Binomial
45 degree line
Sample quantile
0.04 2
Density
0.03 0
0.02
-2
0.01
-4
0.00
-6
0 20 40 60 80 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Number of incidents Theoretical quantile
3.2. Statistical analysis of incident causes and equipment Figs. 5(a) and 6(a), the predictions of the numbers of EF at
types company B are poorer than at company F using the
Poisson distribution, but are improved using the Negative
In this analysis, for each company, Bayesian models are Binomial distribution. This is similar to the predictions for
formulated for each cause and equipment type. Because of the total numbers of incidents at company B, as shown in
the large variations in the number of incidents observed Fig. 4(b), compared with those at company F, as shown in
over the years, the performance of the Gamma-Poisson Fig. 3(b). Yet, the predictions for the OE are comparable at
Bayesian models differ significantly. For company F, companies F and B, and consequently, the larger variation
Figs. 5(a) and (b) show the Q–Q plots for EF and for in reporting incidents at company B are attributed to the
OE, respectively. Fig. 5(a) shows better agreement with the larger variation in the numbers of EF.
model because the variation in the number of incidents Figs. 7(a–d) show the Q–Q plots for incidents associated
related to EF is small, while the variation in the number of with the process units, storage vessels, heat-transfer
incidents related to OE is more significant. This is equipment, and compressors/pumps at company B using
consistent with the expectation that equipment perfor- Poisson and Negative Binomial distributions. The Negative
mance varies less significantly than operator performance Binomial distribution is better for incidents associated with
over time. the process units, compressors/pumps, and heat-transfer
Figs. 6(a) and (b) show the Q–Q plots for EF and equipment, while the Poisson distribution is preferred for
for OE, respectively, at company B. When comparing storage vessels.
a b
Normal Q-Q Plot Normal Q-Q Plot
2.5
3
2.0
Sample quantiles
Sample quantiles
1.5
2
1.0
0.5 1
0.0
0
-0.5
-1.0 -1
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Theoretical quantiles Theoretical quantiles
a b
Normal Q-Q Plot Normal Q-Q Plot
5
Poisson
4 Negative Binomial 2.0
45 degree line
3 1.5
Sample quantiles
Sample quantile
2
1.0
1
0 0.5
-1
0.0
-2
-3 -0.5
-4 -1.0
-5
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5
Theoretical quantile Theoretical quantiles
Sample quantile
Negative Binomial
45 degree line
3 0
2 -0.5
1 -1
0 -1.5
-1 -2
-2 -2.5
-3 -3
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Theoretical quantile Theoretical quantile
45 degree line
6
Sample quantile
2
4
1
2
0
0
-1 -2
-2 -4
-2 -1.5 -1 -0.5 0 0.5 1 1.5 2 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2
Theoretical quantities Theoretical quantile
Fig. 7. Company B: (a) process units, (b) storage vessels, (c) heat-transfer equipment, and (d) compressors/pumps.
3.3. Statistical analysis of chemicals involved be necessary; for example, (1) defining the operator shift and
maintenance schedules, (2) carrying out operator surveys,
For each company, an attempt was made to identify (3) determining operator work loads, and (4) relating the
trends for each of the top five chemicals associated with the data on the causes of the incidents to the days of the week,
largest number of incidents in Harris County obtained identifying more specific patterns. Furthermore, the higher
from the NRC database. However, no specific trends for a means and variances for company G on Friday and
particular chemical associated with a higher number of Saturday suggest that additional data are needed to generate
incidents in all of the companies were observed. This could a reliable Bayesian model.
be because different products are produced in varying
amounts by different companies. It might be preferable to 3.5. Rates of equipment failures and operator errors
carry out the analysis for a company that manufactures
similar chemicals at different locations or for different In this section, for an incident, the probabilities of the
companies that produce similar products. involvement of each of the 13 equipment types and the
probabilities of their causes (EF, OE and O) are modeled.
3.4. Statistical analysis of the day of the week The tree in Fig. 8 shows, for each incident, the possible
causes, and for each cause, the possible equipment types.
For each of the seven companies, Table 2 summarizes the Note that alternatively the tree could show, for each
model checking of the Bayesian predictive distributions of incident, the possible equipment types followed by the
the days of the week, with the mean, E, and variance, V, of z possible causes. x1, x2, x3 are the probabilities of causes
tabulated. Again, the predictions improve with the total EF, OE, and O for an incident, and d1, d2, d3 are the
number of incidents observed for a company. As seen, the cumulative numbers of incidents at the end of each year. e1,
mean and variance of z indicate that higher deviations are e2, e3, y, e13 are the probabilities of the involvement of
observed on Wednesdays and Thursdays for all of the equipment types, E1, E2, y, E13, in an incident through
companies, except company G. Lower deviations occur at different causes, where M1+N1+O1, M2+N2+O2,
the beginning of the week and over the weekends. To M3+N3+O3, y, M13+N13+O13 are the cumulative
understand this observation, more information appears to number of incidents associated with each equipment type.
ARTICLE IN PRESS
122 A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127
Table 2
Q–Q plot properties for day of the week analysis of incidents
A 0.027, 1.5 0.015, 1.06 0.032, 1.55 0.046, 1.9 0.023, 1.31 0.022, 1.23 0.055, 1.93
B 0.032, 1.53 0.047, 1.8 0.06, 2.12 0.058, 2.05 0.035, 1.55 0.027, 1.25 0.033, 1.46
C 0.027, 1.28 0.024, 1.21 0.047, 1.67 0.048, 1.62 0.031, 1.33 0.019, 1.002 0.039, 1.48
D 0.15, 2.3 0.165, 2.7 0.2, 2.96 0.2, 3.22 0.13, 2.44 0.126, 2.22 0.27, 3.4
E 0.038, 1.06 0.037, 1.19 0.086, 1.66 0.078, 1.64 0.11, 1.89 0.07, 1.46 0.036, 0.96
F 0.034, 1.06 0.06, 1.27 0.04, 1.08 0.87, 0.05 0.035, 0.98 0.043, 1.01 0.07, 1.22
G 0.06, 1.09 0.14, 1.29 0.14, 1.29 0.14, 1.29 7.84, 29.26 15.82, 58.48 0.23, 1.96
Entry in each cell–E(z), V(z)
Incident
x1 x2 x3
d1 d2 d3
The prior distributions of the probability of xi are the end of each year, the probabilities increase from 0.5 for
modeled using Beta distributions with parameters ai and bi: the EF, decrease from 0.499 for the OE, and increase from
0.001 for the others, with the OE approaching slightly
f ðxi Þ / ðxi Þai 1 ð1 xi Þbi 1 ; i ¼ 1; . . . ; 3, (3) higher values than those for the others.
having means ¼ ai/(ai+bi) and variances ¼ aibi/[(ai+bi)2 Similarly, analyses for the probabilities of the equipment
(ai+bi+1)]. These conjugate Beta prior distributions are types, e1, e2, y, e13, are carried out using Beta distribu-
updated using Bernoulli’s likelihood distribution to obtain tions, f(ei) and f(ei|Data), with the Data, M1+N1+O1,
the posterior distribution of the probability of xi: M2+N2+O2, M3+N3+O3, y, M13+N13+O13. The
P3 prior distributions of the probabilities of ei are modeled
b 1þ d using Beta distributions with parameters pi and qi:
f ðxi jDataÞ / ðxi Þai 1þd i ð1 xi Þ i k¼1;ai k f ðx Þ:
i (4)
f ðei Þ / ðei Þpi 1 ð1 ei Þqi 1 ; i ¼ 1; . . . ; 13, (5)
The posterior distributions, which are also Beta P distribu-
tions having parameters, ai+di, and bi þ 3k¼1;ai d k , having means ¼ pi/(pi+qi) and variances ¼ piqi/[(pi+qi)2
change at the end of each year as di change. a1 and b1 (pi+qi+1)]. These conjugate Beta prior distributions are
are assumed to be 1.0 to give a flat, non-informative, prior updated using Bernoulli’s likelihood distribution to obtain
distribution; a2 and b2 are assumed to be 0.998 and 1.002 to the posterior distributions of the probabilities of ei:
give a nearly flat, non-informative, prior distribution; and
a3 and b3 are 0.001 and 0.999. Consequently, the mean f ðei jDataÞ / ðei Þpi 1þM i þN i þOi
prior probabilities of EF, OE, and O are 0.5, 0.499, and P13
qi 1þ M k þN k þOk
0.001, respectively, as shown in Fig. 9(a). ð1 ei Þ k¼1;ai
f ðei Þ: ð6Þ
The posterior means and variances are obtained over the
years 1990–2002 for each of the seven companies. Fig. 9(a) The posterior distributions, which are also BetaPdistributions
shows the probabilities, x1, x2, and x3, of the causes EF, having parameters, pi+Mi+Ni+Oi, and qi þ 3k¼1;ai M k þ
OE, and O for an incident at company F. Using the data at N k þ Ok , change at the end of each year as Mi+Ni+Oi
ARTICLE IN PRESS
A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127 123
1
X1 - Equipment Failure
X2 - Operator Error
0.8 Others
Expected values
Company F (Process vessel)
0.6
Expected value PV
0.6
0.5
0.4 0.4
0.3
0.2 0.2
0.1
0 0
0 2 4 6 8 10 12 0 5 10 15
Year Year (1990-2002)
Fig. 9. Probabilities of xi for company F: (a) EF, OE, and others, (b) PV.
Table 3
OE/EF ratio for the petrochemical (P) and specialty chemical (S) companies
change. The parameters, pi and qi, are chosen to give flat, for each group of companies are identically and indepen-
non-informative, prior distributions. dently distributed (i.i.d.). For these reasons, all of the
The posterior means and variances are obtained over the analyses in Sections 3.1–3.5 were repeated with the data for
years 1990–2002 for each of the thirteen equipment types at specialty chemical and petrochemical manufacturers lumped
each of the seven companies. Fig. 9(b) shows, for an together. Because the number of datum entries in each
incident, that the probability of the involvement of the lumped data set is increased, the circles on the Q–Q plot lie
process vessels (PV) decreases over time. Similarly, the closer to the straight line. However, the cumulative
probabilities for the other equipment types approach stable predictions for the specialty chemical and petrochemical
values after a few years with occasional departures from manufacturers differ significantly from those for the
their mean values. individual companies. Hence, it is important to carry out
company specific analyses. Nevertheless, when insufficient
3.5.1. Equipment and human reliabilities data are available for each company, the cumulative
By comparing the causes of incidents between the EF predictions for specialty chemical and petrochemical man-
and OE, insights regarding equipment and human reli- ufacturers are preferable. Furthermore, when insufficient
abilities are obtained. In Table 3, where the range of the lumped data are available for the specialty chemicals and
annual OE/EF ratio for all of the companies is shown, petrochemical manufacturers, trends may be identified by
incidents involving EF exceed incidents involving OE. As combining the data for all of the companies.
mentioned in Section 3.1, the low OE/EF ratios are
probably due to the operator bias when reporting 3.7. Modeling the loss-severity distribution using extreme
incidents. Nevertheless, for petrochemical companies, the value theory
ratio is much lower than for specialty chemical companies.
This is anticipated because the manufacture of specialty For rare events with extreme losses, it is important to
chemicals involves more batch operations, increasing the identify those that exceed a high threshold. Extreme value
likelihood of OE. theory (EVT) is a powerful and fairly robust framework to
study the tail behavior of a distribution. Embrechts et al.
3.6. Specialty chemicals and petrochemicals (1997) provide an overview of EVT as a risk management
tool, discussing its potential and limitations. In another
To identify trends in the manufacture of specialty study, McNeil (1997) examines the estimation of the tails of
chemicals and petrochemicals, data for companies C, E, F, the loss-severity distributions and the estimation of quantile
and G are combined and compared with the combined data risk measures for financial time-series using EVT. Herein,
for companies A, B, and D. Note that this is advantageous EVT, which uses the generalized Pareto distribution
when the data for a single company are insufficient to (GPD), is employed to develop a loss-severity distribution
identify trends, and when it is assumed that the lumped data for the seven chemical companies. Other methods use the
ARTICLE IN PRESS
124 A. Meel et al. / Journal of Loss Prevention in the Process Industries 20 (2007) 113–127
Fu(y)
(7) 0.5
790476.41
1973761.0
b
6000000
GðlÞ ¼ , (8)
: ;
VaR =
1 el=b if x ¼ 0
where b is the scale parameter, x is the shape parameter, 1
and the tail index is x1. Note that the GPD reduces to
different distributions depending on x. The distribution of
excesses may be approximated by the GPD by choosing x 0.1
and b and setting a high threshold, u. The parameters of
1-Fu(y)
In this work, the primary focus is on calculating the As when estimating the frequency of incidents (Section 2),
operational risk associated with a chemical company, a frequency distribution is obtained initially using
which is defined as the risk of direct or indirect losses Bayesian theory for events with losses that exceed a
resulting from inadequate or failed internal resources, threshold, u. Because operational risks are difficult to
people, and systems, or from external events. estimate shortly after operations begin, conservative
Capital charge (that is, CaR) of a company due to estimates of the parameters of the Poisson distri-
operational risk is calculated herein. Capital charge is bution may be obtained. In these cases, the sensitivity of
obtained from the total loss distribution (to be defined the CaR to the frequency parameter should be examined.
below) using the VaR. Computation of the total loss After the frequency distribution is obtained, it is multiplied
distribution is a common statistical approach in the with the loss-severity distribution and the Fast-Fourier
actuarial sciences. This paper applies this approach to risk transform (FFT) is used to calculate the total loss
analysis in the chemical industries. There are four methods distribution.
for obtaining capital charge associated with operational
risk: (i) the basic indicator approach (BIA), (ii) the
standardized approach (SA), (iii) the internal measurement 4.1. Fast-Fourier transform (FFT) algorithm
approach (IMA), and (iv) the loss distribution approach
(LDA). The LDA (Klugman, Panjer, & Willmot, 1998) is The algorithm for computing the total loss distribution
considered to be the most sophisticated, and is used herein. using the FFT is described in this section. Aggregate losses
In the LDA, the annual frequency distribution of are represented as the sum, Z, of a random number, N, of
incidents is obtained using internal data, while the loss- individual losses, l1, l2, y, lN. The characteristic function
severity distribution of an incident is obtained using of the total loss, fz(t), is:
internal and external data, as discussed in Section 3.7.1.
fz ðtÞ ¼ E½eitðZÞ ¼ E N ½E½eitðl 1 þl 2 þ...þl N Þ jN
By multiplying these two distributions, the total loss
distribution is obtained. ¼ E N ½fl ðtÞN ¼ PN ðfl ðtÞÞ, ð10Þ
Fig. 12 shows a schematic of the total loss distribution
where PN is the probability generating function of the
for a chemical company. The expected loss corresponds to
frequency of incidents, N, and fl is the characteristic
the mean (expected) value and the unexpected loss is the
function of the loss-severity distribution. The FFT pro-
value of the loss for a specified percentile (e.g., 99.5%)
minus the expected loss. Note that, in some circles, the CaR duces an approximation of fz and, using fz, the inverse
is defined as the unexpected loss. However, herein, in fast-Fourier transform (IFFT) gives fz(Z), the discrete
agreement with other institutions, the CaR is the sum of probability distribution of the total (aggregate) loss. The
the expected and unexpected losses, at the 99.5 percentile of details of the FFT, IFFT, and the characteristics function
the total loss distribution. are found elsewhere (Klugman et al., 1998).
First, np ¼ 2r for some integer r is chosen, where np is the
Highly accurate estimates of the CaR are difficult to
desired number of points in the distribution of total losses,
compute due to the scarcity of internal data for the extreme
such that the total loss distribution has negligible prob-
events at most companies. Also, internal data are biased
towards low-severity losses while external data are biased ability outside the range [0, np]. Herein, r ¼ 13 provides a
towards high-severity losses. Consequently, a mix of sufficiently broad range. It can be adjusted according to the
internal and external data is needed to enhance the number of incidents in a company. The next steps in the
statistical significance. Furthermore, it is important to algorithm are:
balance the cost of recording very low-severity data and the
truncation bias or accuracy loss resulting from the use of 1. The loss-severity distribution is transformed from
unduly high thresholds. continuous to discrete using the method of rounding
(Klugman et al., 1998). The span is assumed to be
$20,000 in line with the threshold for the GPD. The
discrete loss-severity vector is represented as fl ¼ [fl(0),
fl(1), y, fl(np-1)].
2. The FFT of the discrete loss-severity vector is carried
Probability
100 10-1
10-1 10-2 th
99.5 Percentile
th
1-FZ(Z)
1-FZ(Z)
99.9 Percentile
10-2 th
10-3
99.5 Percentile
th
99.9 Percentile
10-3 10-4
10-4 10-5
10-5 10-6
104 105 106 107 108 109 104 105 106 107 108 109
Z, Aggregate Loss Z, Aggregate Loss
Fig. 13. Total loss distribution for: (a) company B, (b) company F.
4.2. Total loss distribution for companies B and F 4. Are beneficial for obtaining the value at risk (VaR) from
the loss-severity distribution using EVT and the capital
The Poisson frequency parameters for companies B and at risk (CaR) from the total loss distribution.
F, obtained using internal data for each company, are
lB ¼ 0.8461 and lF ¼ 0.0769. These are obtained using Consistent reporting of incidents is crucial for the reliability
Bayesian theory for their incident data through the years 1 of this analysis. In addition, the predictive errors are reduced
to n1 (1990–2001) for incidents having losses that exceed when: (i) sufficient incidents are available for a specific
or equal the threshold, $10,000. The low lF indicates the company to provide reliable means, and (ii) less variation
low probability of incidents having significant losses in occurs in the number of incidents from year-to-year.
company F. For company B, lB indicates that about one Furthermore, to obtain better predictions, it helps to select
event, with l4$10,000, is anticipated in the next year. Note distributions that better represent the data, properly modeling
that the loss-severity distributions in Figs. 10 and 11 are the functionality between the mean and variance of the data.
obtained using both internal and external data.
Fig. 13(a) shows the tail of the cumulative plot of the
Acknowledgment
total loss distribution for company B. The total loss at the
99.5th percentile is $3.76 106 and at the 99.9th percentile
The interactions and advice of Professor Paul Kleindor-
is $14.1 106. When lBb1, a much higher value of CaR is
fer of the Wharton Risk Management and Decision
expected. Similarly, Fig. 13(b) shows the tail for company
Processes Center, Wharton School, University of Pennsyl-
F. The total loss at the 99.5th percentile is $0.43 106 and
vania, and Professor Sam Mannan of the Mary Kay
at the 99.9th percentile is $1.78 106. As expected, the CaR
O’Connor Process Safety Center, Texas A&M University,
for company F is lower than for company B by an order of
are appreciated. Partial support for this research from the
magnitude.
National Science Foundation through grant CTS-0553941
Hence, this method provides plant-specific estimates of the
is gratefully acknowledged.
CaR. Such calculations should be performed by chemical
companies to provide better estimates for insurance pre-
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