Bilal M. Ayyub

Professor and Director, Center for Technology and Systems Management, Department of Civil and Environmental Engineering, University of Maryland, USA

Market-based loss-amplification factors for including risk aversion in the economics of managing climate and other risks

Some decisions entail significant risk requiring special attention to risk tolerances and attitudes including risk aversion. Organizations typically institute enterprise risk management programs to efficiently and effectively manage safety, reliability and financial risks for their customers, employees and communities in a changing climate with intensifying risks, such as coastal storms, wildfire, air quality, etc. Consequences from such events could include human life and property losses, health effects, environmental damage, service loss, and other indirect financial and economic impacts. A spectrum of risk quantification and management methods are available for assessing these hazards. Varying risk tolerances and attitudes of stakeholders creates situations that are central to decision-making where the safety, service delivery reliability, affordability and the financial wellbeing of entities come together and interact in a complex manner. This paper sets context, defines key terms, and develops an innovative approach for methodically reflecting risk tolerance and attitude with a focus on risk aversion in informing risk management decisions by offering flexibility to account for preferences by stakeholders in a structured manner. The concept of risk-aversion amplification factors is proposed to reflect attitudes and preferences of decision makers in typical economic models used in benefit-cost analysis. Such amplification factors can be calibrated by applicable markets, such as insurance and catastrophe bond markets and used to estimate certainty-equivalent valuations of risks, costs and benefits. The proposed methods are illustrated in the context of wildfire risk management for communities and utilities using two examples from these domains for enhancing resilience.

Personal Profile:
Bilal Ayyub is Professor and the director of the University of Maryland Center for Technology and Systems Management. His specialties and expertise are in the areas of risk, uncertainty and decision analysis, systems engineering, risk management including finance, and climate adaptation. He has completed research projects and studies for NOAA, FRA, NSF, USCG, DOD, DHS, and several engineering companies. He is an Academician of the Georgian National Academy of Science, Tbilisi, Georgia. As a distinguished member of the ASCE, an honorary member of ASME, and a fellow SEI, SNAME and SRA, he has served the engineering community in various leadership capacities. Among the 650 publications co-authored with colleagues and former students are more than 20 books, including several textbooks adopted for courses at universities. He is also associated with BMA Engineering, working on infrastructure and defense systems including economic and financial modeling and risk analysis. He has served on the board of several research and development companies.