Risk management plays a critical role in any organization, for it is paramount to be able to cope with adverse events should they occur, or the consequences might be rather severe. Therefore, the process of risk assessment is crucial, for it permits developing countermeasures to address potential risks. This paper explains which variables should be considered when estimating the level of a risk, and what their relative importance is.
Generally speaking, when carrying out the process of risk assessment, it is pivotal to take into account two main variables: the probability of occurrence of a risk and the severity of its impact (McNeil, Frey, & Embrechts, 2015). It is often convenient to create tables or graphs so as to be better able to assess the level of a particular risk, and, consequently, to develop steps and countermeasures that should be taken in order to decrease the level of danger that this risk poses (Linkov, Anklam, Collier, DiMase, & Renn, 2014). However, when creating such tables or graphs, it is important to decide the level of relative importance of the two variables. That is, it should be decided whether the probability of occurrence of a risk or the severity of its impact takes priority when assessing the level of the risk.
However, even though the relative importance of each of the two variables may vary to a certain extent from case to case, the severity of impact of a risk plays a far greater role than the probability of that risk occurring (Erbschloe, 2003). This is due to the fact that when dealing with risks that are of high probability, but of low severity of impact, an entity (e.g., an organization) should be capable of dealing with that adverse impact without significant losses if the situation in question occurs (Linkov et al., 2014). On the other hand, even if the probability of a risk is low, but the potential losses are staggering, this risk should be considered a high-level risk, because it might be impossible to recover from its consequences should the situation take place.
For instance, if there is a high risk of a blackout (e.g., due to windy weather) in a language school where teachers use printed books and blackboards for teaching, the impact will be minor: the teachers will still be able to give their lessons because they do not need electricity much. At worst, the school will have to cancel the classes in the evening, when it is dark. Nevertheless, if the risk of an adverse event is high, it would still be wise to try to decrease its probability, and/or to negate its impact. In the given example, it may not be possible to decrease the probability of a blackout, because the school does not control the weather or the resilience of power lines; so the school ought to lower the consequences of a risk, for instance, by purchasing some lamps working on batteries, so that the impact of the blackout would be nullified, the classes would not have to be cancelled, and there would be virtually no losses at all.
On the other hand, a risk that may have a profoundly severe impact should be taken seriously and considered high-level, even if its probability of occurring is very low (McNeil et al., 2015). For example, in some organizations (e.g., on factories), there might be a risk of injury or death of a member of the personnel. On a nuclear power plant, there might be a very low risk of an event that can lead to a contamination of the environment with radioactive substances. Even though there might be a very low probability of such an event occurring, it should still be considered a high-level risk, and all the possible measures ought to be taken in order to further lower its probability, as well as to decrease its potential impact (Erbschloe, 2003). For instance, in a factory, workers might have to wear protective clothes and helmets to decrease the severity of injury they might gain; the equipment they work on should have some safeguards to reduce the probability of a traumatic event. On a nuclear power plant, all possible measures should be taken to prevent any malfunction and to decrease the probability of a risk of radioactive contamination (Kim, Cho, & Jeong, 2014). Also, numerous reliable safeguards should be put in place in order to lower the potential impact of a malfunction; for instance, some type of protective shell should be built around the reactor so as to contain radioactive materials if some leak or burst of these takes place.
Clearly, the risks that are of high probability and of high impact ought to be considered critical. In such situations, it is often better not to take risk at all (Erbschloe, 2003). For instance, miners should not work in an underground mine with a high probability of a cave-in. On the other hand, risks of low impact and low probability can often be ignored. For example, if in the above-mentioned school, the probability of a blackout is very low, it is perhaps unnecessary to purchase lamps working on batteries.
On the whole, when assessing risks, the severity of a risk is, in general, much more important than its probability. This is because for low-impact risks, it is possible to cope with their adverse consequences and simply go on, even if they occur rather frequently. However, for high-impact risks, the consequences might be disastrous, and it may be impossible to cope with them should they occur, so they cannot be ignored, even if the event in question is unlikely.
References
Erbschloe, M. (2003). Guide to disaster recovery. Mason, OH: Course Technology.
Kim, J. W., Cho, D. K., & Jeong, J. (2014). A methodology for a risk-based approach to complex scenarios in a long-term safety assessment of a radioactive waste repository. Nuclear Engineering and Design, 268, 58-63.
Linkov, I., Anklam, E., Collier, Z. A., DiMase, D., & Renn, O. (2014). Risk-based standards: Integrating top-down and bottom-up approaches. Environment Systems and Decisions, 34(1), 134-137.
McNeil, A. J., Frey, R., & Embrechts, P. (2015). Quantitative risk management: Concepts, techniques and tools. Princeton, NJ: Princeton University Press.