Risk Analysis - 5.2
Summary
Risk analysis involves assessing risks using qualitative and quantitative methods, calculating potential losses (SLE, ARO, ALE), evaluating probability vs. likelihood, determining exposure factor and impact on safety, property, data, and finances, and managing risks through risk appetite, tolerance, and risk registers.
Notes:
Qualitative vs Quantitative
- Qualitative: Describes risk in terms of subjective factors like opinions, statements, and evaluations. Typically used for non-financial aspects of risk, such as reputational damage, safety concerns, or operational impact.
- Quantitative: Uses measurable data, such as numbers and statistics, to describe risk. Often focused on financial risks or risks that can be quantified in terms of severity (e.g., monetary loss).
Loss and Occurrence
- Single Loss Expectancy (SLE): The expected monetary loss from a single occurrence of a risk event.
- Annualized Rate of Occurrence (ARO): The estimated frequency of the risk event occurring within a year.
- Annualized Loss Expectancy (ALE): The total expected loss in a year, calculated as the product of SLE and ARO (ALE = SLE × ARO).
Probability vs Likelihood
- Probability: A numerical or statistical measure of the likelihood that a particular risk event will occur (e.g., percentages, probabilities).
- Likelihood: A more qualitative measure of how likely an event is to occur, often expressed in terms like "rare," "possible," or "likely."
Exposure Factor (EF)
- The percentage of the total asset value that is lost due to a specific risk event (e.g., an EF of 50% means half the asset value is lost if the risk occurs).
Impact
- Safety: Impacts on physical safety or well-being.
- Property: Damage or loss to physical assets.
- Data: Loss or compromise of data or sensitive information.
- Finances: Monetary losses or costs related to a risk event.
Risk Appetite
- A company’s overall strategy or willingness to take on risk in pursuit of its objectives, which can be:
- Expansionary: Willing to take on significant risk for potential growth.
- Conservative: Takes on minimal risk, prioritizing stability and security.
- Neutral: Balanced approach to risk, taking calculated risks as necessary.
Risk Tolerance
- The specific amount or level of risk an organization is willing to accept in different situations.
Risk Register
- Key Risk Indicators (KRI): Metrics used to identify and track potential risks.
- Risk Owners: Individuals responsible for managing specific risks.
- Risk Threshold: The point at which the risk becomes unacceptable, requiring mitigation efforts. This compares the cost of managing the risk against the potential losses if the risk materializes.