Residual risk
The residual risk is the amount of risk or danger associated with an action or event remaining after natural or inherent risks have been reduced by risk controls.[1]
One approach to scoring residual risk is to apply subjective judgement without applying any mathematical relationship between the inherent risk and the level of control effectiveness. A second method is to apply a mathematical approach.[2]
The general formula to calculate residual risk is
where the general concept of risk is (threats × vulnerability) or, alternatively, (severity × probability).
An example of residual risk is given by the use of automotive seat-belts. Installation and use of seat-belts reduces the overall severity and probability of injury in an automotive accident;[3] however, probability of injury remains when in use, that is, a remainder of residual risk.
In the economic context, residual means “the quantity left over at the end of a process; a remainder”[4]
In the property rights model it is the shareholder that holds the residual risk and therefore the residual profit.
See also
References
- ^ Gregory Monahan (2008). Enterprise Risk Management: A Methodology for Achieving Strategic Objectives. John Wiley & Sons.
- ^ Tattam, David. "The Scoring of Residual Risk". Protecht Risk Management Insights. Retrieved 2017-05-01.
- ^ "Seat Belts: Get the Facts". Motor Vehicle Safety. Centers for Disease Control. 20 August 2015. Retrieved 2016-02-15.
- ^ "dictionary.com".
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