Risk Management

# The Value of Life, Statistically Speaking

Why an ethically complicated calculation can help determine the value of your company’s risk reduction programs.
Rick JonesJanuary 31, 2012

How much are you worth? I’m not asking about your money or property but your ultimate physical asset — you. At the individual level, life is valued as priceless. But at a societal or business level, our lives and safety do have price tags. This is the reality associated with having finite resources to reduce risk. So the real cost-benefit question is how much can a society or a company afford to do to save lives and reduce injuries? The statistical value of life is a term developed from answering this question.

Here’s an example how the value of a statistical life can be computed. Suppose a state government decides to reduce the speed limit on its roads. The general correlation between highway speed limits and auto deaths is well known; highway safety statisticians estimate that if the maximum speed limit is reduced to 50 miles per hour, 20 lives would be saved each year. However, in order to enforce the new law, additional resources will be required, costing the state \$120 million per year. So it costs the state \$120 million each year to save 20 lives or \$6 million per life. This is the value of a statistical life related to this highway risk reduction program.

Statistical life values can be useful tools to help measure the value of your risk reduction programs either through direct calculations or by comparing your calculations with other industry estimates. The comparison can provide a valuable benchmark with various situations that you can use to judge and perhaps justify programs to others in senior management and the board.

The methodologies used to compute these cost-benefit statistics vary, but they all stem from two basic components: the estimated lives saved and the costs associated with the programs. The calculations are a blend of science and statistics that often require detailed research and analysis, and they can also be interpreted and applied differently depending on the activities involved. For example, in a 2010 report relating to engine emissions, the Environmental Protection Agency applied a mean value of a statistical life at \$9.1 million. The Food and Drug Administration works with a figure around \$8 million, and other government agencies use numbers around \$6 million.

The fact that these numbers differ makes sense. Not all risk reduction programs are equally efficient at reducing risk and, of course, the calculations contain statistical uncertainty. Yet in addition to these sources of variation there can be ethical issues that have the potential to transform the technical analyses into philosophical debates.

Are all lives saved worth the same amount? Is saving the lives of children equivalent to saving senior citizens? Is it worth saving or extending the life of a person for a period of years if that person requires ongoing and intensive medical care? In dealing with saving lives, the “type” of life being saved and the quality of remaining life may be variables in the analysis. The point is, depending on the situation, ethical judgments can be included in the analyses that in effect, answer these questions.

While making these decisions on the surface may sound unfair or elitist, they are made one way or another when only finite resources are available to reduce risk. And since this is always the case, virtually every health, safety, or other risk management program contains decisions related to these ethical issues.

For example, either as a parent or a child, most likely you have been exposed to programs that contain some of these issues. Inoculating children to prevent infectious disease transmission is good for society from both health and financial perspectives, but some initially healthy children may suffer adverse reactions, injury, or even death. For vaccines, the enormous societal benefits trump the tragedies of the few. And in order to keep the vaccine costs affordable, the U.S. government administrates and pays all vaccine compensation claims through its Vaccine Lawsuit Injury Compensation program. Inoculation requirements and the accepted reasons to opt out vary by state. In 2011, the National Vaccine Injury Compensation Program received over 1,000 new claims and awarded 250 plaintiffs more than \$228 million for injuries and deaths from the vaccines administered to both adults and children.

There is no doubt that vaccines have the potential to do harm to a very small portion of the population. But just look at what vaccines have done for us. Polio is no longer a threat in most of the world. Measles, chicken pox, pertussis (whooping cough), and of course smallpox, the former serial killer, have been virtually eliminated. The lives saved and dollar benefits from vaccines are hard to calculate, but it’s safe to say that these and other immunizations have greatly improved the quantity and quality of life for millions of people — at the tragic, yet accepted cost of a few.

Value of statistical life and also statistical injury calculations provide metrics you can compare with other industry or government produced calculations. Together these results can help you answer the question “Are we doing ‘enough’ to reduce risk with our available resources?” And perhaps more importantly answer the question: “Should we do more?”

Rick Jones has spent the past 30 years applying risk analysis and
management techniques to industrial and business problems. He has presented at
several conferences and is the author of numerous articles and technical
research papers. His third book,
20% Chance of Rain: Exploring the Concept
of Risk, was recently published.