Residual risk

The residual risk is the risk or danger of an action or an event, a method or a (technical) process that, although being abreast with science, still conceives these dangers, even if all theoretically possible safety measures would be applied (scientifically conceivable measures); in other words, the amount of risk left over 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

  1. ↑ Gregory Monahan (2008). Enterprise Risk Management: A Methodology for Achieving Strategic Objectives. John Wiley & Sons.
  2. ↑ Tattam, David. "The Scoring of Residual Risk". Protecht Risk Management Insights. Retrieved 2017-05-01.
  3. ↑ "Seat Belts: Get the Facts". Motor Vehicle Safety. Centers for Disease Control. 20 August 2015. Retrieved 2016-02-15.
  4. ↑ "dictionary.com.".
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