Financial risk assessment methodology for natural hazards

Abstract

Engineered facilities are deemed safe if they have little or no probability of incurring damage when subjected to regular actions or natural hazards. Any probability of the performance of any designed system (i.e. capacity) not being able to meet the performance required of it (i.e. demand) results in risk, which might be expressed either as a likelihood of damage or potential financial loss. Engineers are used to dealing with the former (i.e. damage), which gives a fair indication of repair/strengthening work needed to bring the system back to full functionality. Nevertheless, other non-technical stakeholders (such as owners, insurers, decision-makers) of the designed facilities cannot read too much from damage. Hence, risk, if interpreted in terms of damage only, will not be comprehended by all stakeholders. On the other hand, financial risk expressed in terms of probable dollar loss in easily understood by all. Therefore, there is an impetus on developing methodologies which correlate the system capacity and demand to financial risk. This paper builds on the existing probabilistic risk assessment methodology and extends it to estimate expected annual financial loss. The general methodology formulated in this paper is applicable to any engineered facilities and any natural hazard. To clarify the process, the proposed methodology is applied to assess overall financial risk of a highway bridge pier due to seismic hazard.