We estimate or measure things in full recognition that there is an inaccuracy associated with either. We often measure samples to infer values of all members of the population. We understand that the real world involves distributions of possible values, not point values. The nominal wall thickness we record is 0.250 inches but we know that, at various points along the pipeline, the wall thickness may actually range from 0.231 inches to 0.267 inches. We estimate the average risk (expected loss) for a segment of pipeline to be $US220/a but we understand that there can be a multi-million dollar incident here next year, and again the year after.
We cannot eliminate uncertainty, but we can manage it. This exactly mirrors risk: we cannot eliminate that either, but can manage it.
It is important that a risk assessment identifies the role of uncertainty in its calculations. Each assessment should be performed with a pre-determined target level of conservatism, which includes the handling of ‘uncertainty’ for our purposes here. Depending on the intended use of the risk assessment results, various levels of conservatism might be appropriate. As an aid to communication of conservatism level, a PXX designation can be used to show a level of confidence that actual experience will be no worse than estimated. For instance, P90 is the point where 90 per cent of future performance is expected to be ‘better’ than this value—one would be negatively surprised 10 per cent of the time or once out of every ten episodes. P99.9 is very conservative—a negative surprise occurs only once out of every 1,000 episodes.
The risk modeller should determine the level of conservatism appropriate to his audience (normally the users are decision-makers) needs. The PXX designation communicates this to the user of the risk assessment. PXX can refer to various aspects such as the conservatism in each input value or the conservatism in the final estimate.