Appendix 7 - Examples of Calculation of Indices for Cost-Effectiveness

 1 Indices for cost-effectiveness on safety

1.1 Introduction

The purpose of this appendix is to suggest a set of cost-effectiveness criteria, which may be used in FSA studies. The use of these cost-effectiveness criteria would enable the FSA studies to be conducted in a more consistent manner, making results and the way they were achieved better comparable and understandable. This appendix provides clarification on available criteria to assess the cost-effectiveness of risk control options so-called cost-effectiveness criteria. It is also recommended how these criteria should be applied.

1.2 Terminology

1.2.1 DALY (Disability Adjusted Life Years)/QALY (Quality Adjusted Life Years): The basic idea of a QALY is one year of perfect health-life expectancy to be worth 1, but regards one year of less than perfect health-life expectancy as less than 1. Unlike QALY, the DALY assigns that one year of perfect health-life to be 0 and one year of less than perfect as more than 0.

1.2.2 LQI (Life Quality Index): The index for expressing the social, health, environment and economic dimensions of the quality of life at working conditions. The LQI can be used to comment on key issues that affect people and contribute to the public debate about how to improve the quality of life in our communities.

1.2.3 GCAF (Gross Cost of Averting a Fatality): A cost-effectiveness measure in terms of ratio of marginal (additional) cost of the risk control option to the reduction in risk to personnel in terms of the fatalities averted; i.e.

• 

1.2.4 NCAF (Net Cost of Averting a Fatality): A cost-effectiveness measure in terms of ratio of marginal (additional) cost, accounting for the economic benefits of the risk control option to the reduction in risk to personnel in terms of the fatalities averted, i.e.

• 

1.3 NCAF and GCAF

1.3.1 The common criteria used for estimating the cost-effectiveness of risk reduction measures are NCAF and GCAF. In principle there are several approaches to derive NCAF and GCAF criteria:

• .1 Observation of the Willingness-To-Pay to avert a fatality;

• .2 Observation of past decisions and the costs involved with them; and

• .3 Consideration of societal indicators such as the Life Quality Index (LQI).

For further detail, reference is made to Nathwani et al., Rackwitz (2002).

1.3.2 The proposed values for NCAF and GCAF in table 2 were derived by considering societal indicators (refer to document MSC 72/16, UNDP 1990, Lind 1996). They are provided for illustrative purposes only. The specific values selected as appropriate and used in an FSA study should be explicitly defined. These criteria given in table 2 are not static, but should be updated every year according to the average risk free rate of return (approximately 5%) or by use of the formula based on LQI (Nathwani et al. (1996), Skjong and Ronold (1998, 2002), Rackwitz (2002 a,b).

1.3.3 It is recommended that the following approach is applied in using GCAF and NCAF criteria:

• .1 GCAF or NCAF:

  In principle, either of the two criteria can be used. However, it is recommended to firstly consider GCAF instead of NCAF. The reason is that NCAF also takes into account economic benefits from the RCOs under consideration. This may be misused in some cases for pushing certain RCOs, by considering more economic benefits on preferred RCOs than on other RCOs.

  If the cost-effectiveness of an RCO is in the range of criterion, then NCAF may be also considered.

• .2 Negative NCAF:

  Recent FSA studies have come up with some risk control options (RCO) where the associated NCAF was negative. Assuming that the RCO has a positive risk reduction potential ΔR (i.e. reduces the risk), a negative NCAF means that the benefits in monetary units are higher than the costs associated with the RCO. It should be noted that a high negative NCAF with positive ΔR may result from either of the following two facts:

  • .1 the benefits are much higher than the costs associated with the RCO; or

  • .2 the RCO has a low risk reduction potential ΔR (the lower ΔR, the higher is the NCAF, refer to formula (2)).

1.3.4 Therefore, RCOs with high negative NCAFs should always be considered in connection with the associated risk reduction capability.

QALY and/or DALY

1.3.5 The QALY or DALY criterion can be used for risks that only involve injuries and/or ill health, but no fatalities. It can be derived from the GCAF criterion, by assuming that one prevented fatality implies 35 Quality Adjusted Life Years gained (refer to document MSC 72/16):

• QALY = GCAF (covering injuries/ill health) / 35 = US$42,000.

2 Environmental risk evaluation criteria on prevention of oil spill from ships

2.1 Noting that the most appropriate conversion formula to use will depend on the specific scope of each FSA to be performed, a general approach to be followed is outlined in the following suggested examples.

Cost for compensating oil spills

2.2 Consolidated oil spill database based on IOPCF data; US Data; and Norwegian data.

2.3 Figure 1 shows the data of the consolidated oil spill database in terms of specific costs per tonne spilled (figure 5 of document MEPC 62/INF.24). Further information with respect to the basis of the database can be found in document MEPC 62/INF.24. It should be acknowledged that the consolidated oil spill database has limitations and possible deficiencies. These are described in document MEPC 62/INF.24 and may also involve incomplete or missing data on costs or other information.

Figure 1: All specific oil spill cost data in 2009 USD (spill cost per tonne)

Source: document MEPC 62/INF.24

2.4 The submitter of the FSA can amend this database with new oil spill data, however, this amendment should be properly documented.

2.5 Some regression formulae derived from the consolidated oil spill database are summarized in table 1 in which V is spill size in tonnes.

Table 1: Regression formulae derived from the consolidated database

2.6 FSA analysts are free to use other conversion formulae, so long as these are well documented by the data. For example, if an FSA is considering only small spills, the submitter may filter the data and perform his or her own regression analysis.

2.7 It is recommended that the FSA analyst use the following formula to estimate the societal oil spill costs (SC) used in the analysis:

• SC(V) = F_Assurance ∗ F_Uncertainty ∗ f(V)

• This equation considers:

• .1	Assurance factor (FAssurance):	allowing for society's willingness to pay to avert accidents;
  .2	Uncertainty factor (FUncertainty):	allowing for uncertainties in the cost information from occurred spill accidents; and
  .3	Volume-dependent total cost function (f(V)):	representing the fact that the cost per unit oil spilled decreases with the spill size in US$ per tonne oil spilled.

2.8 The values of both assurance and uncertainty factors should be well documented. In addition, if value of F_Assurance and F_Uncertainty other than 1.0 are used, a cost-effective analysis using F_Assurance = 1.0 and F_Uncertainty = 1.0 should be included in the FSA results, for reference.

2.9 In order to consider the large scatter, the FSA analyst may perform a regression to determine a function f(V) that covers a percentile different than 50% and document it in the report.

Application in RCO evaluation

2.10 The FSA analyst should perform a cost-benefit and cost-effectiveness evaluation of the RCOs identified and provide all relevant details in the report, as outlined below.

RCOs affecting oil spills only

2.11 In case an RCO affects oil spills only:

• RCO is cost-effective if ΔC < ΔSC

• ΔC = Expected cost of the RCO

• ΔSC = (Expected SC without the RCO) – (Expected SC with the RCO) = Expected benefit of the RCO

RCOs affecting both safety and environment

2.12 In case of RCOs addressing both safety and environment the following formula is recommended:

• NCAF = (ΔC – ΔSC) / ΔPLL

• In the above,

  • ΔC = Expected cost of the RCO

  • ΔSC = (Expected SC without the RCO) – (Expected SC with the RCO) = Expected benefit of the RCO

  • ΔPLL = Expected reduction of fatalities due to the RCO

2.13 The criteria for NCAF are as per table 2 of appendix 7 of document MSC 83/INF.2.

2.14 In case there is an economic benefit (ΔB), ΔC should be replaced by ΔC-ΔB.

2.15 It is also emphasized that all cost and benefit components of the cost-benefit or cost-effectiveness inequality should be shown in an FSA study for better transparency.

Other indices

2.16 The user is free to develop new approaches, taking into account the objectives of the FSA.