Risk is a term that relates the probability, consequences, and exposure to an event. It is a way of measuring the potential impact of an event on the objectives or goals of an organization, project, or activity. Risk analysis and management are processes that help identify, assess, and control risks in order to reduce their negative effects and enhance their positive opportunities.
What is Risk?
According to SpringerLink, risk is defined as:
The classical notion of risk being proportional to a measure for probability of events and measure for consequences of an event.
In other words, risk is the product of the likelihood of an event occurring and the severity of its outcomes. For example, the risk of a fire in a building is determined by the probability of a fire starting and the damage it would cause to the structure, people, and property.
What are the Components of Risk?
Risk can be broken down into three main components: probability, consequences, and exposure.
- Probability is the chance or frequency of an event happening. It can be expressed as a percentage, a fraction, a ratio, or a number between 0 and 1. Probability can be estimated based on historical data, expert judgment, statistical analysis, or other methods.
- Consequences are the results or effects of an event. They can be positive or negative, tangible or intangible, direct or indirect. Consequences can be measured in terms of costs, benefits, losses, gains, impacts, or other indicators.
- Exposure is the extent or degree to which an entity is affected by an event. It can be influenced by factors such as location, duration, frequency, intensity, vulnerability, resilience, or mitigation. Exposure can be assessed in terms of exposure units, such as people, assets, activities, or processes.
How to Analyze and Manage Risk?
Risk analysis and management are interrelated processes that involve several steps1:
- Identify the sources of risk and the potential events that could pose a threat or opportunity to the objectives or goals.
- Analyze the probability and consequences of each event and estimate the level of risk using qualitative or quantitative methods.
- Evaluate the level of risk against predefined criteria or standards and determine whether it is acceptable or unacceptable.
- Treat the unacceptable risks by selecting and implementing appropriate strategies or actions to reduce, transfer, avoid, or accept them.
- Monitor and review the effectiveness of the risk treatment strategies or actions and update the risk analysis and management process as needed.
Why is Risk Analysis and Management Important?
Risk analysis and management are important for several reasons1:
- They help identify and prioritize the most significant risks that could affect the objectives or goals.
- They help allocate resources and efforts efficiently and effectively to address the risks.
- They help improve decision making and planning by providing information and insights on the uncertainties and opportunities.
- They help enhance performance and outcomes by reducing negative impacts and increasing positive benefits.
- They help comply with legal, ethical, social, environmental, or other requirements or expectations.