The residual risk is the amount of
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
or
danger associated with an action or event remaining after natural or
inherent risk
Inherent risk, in risk management, is an assessed level of raw or untreated risk; that is, the natural level of risk inherent in a process or activity without doing anything to reduce the likelihood or mitigate the severity of a mishap, or the amou ...
s have been reduced by risk controls.
The general formula to calculate residual risk is
:
where the general concept of risk is (
threat
A threat is a communication of intent to inflict harm or loss on another person. Intimidation is a tactic used between conflicting parties to make the other timid or psychologically insecure for coercion or control. The act of intimidation f ...
s ×
vulnerability
Vulnerability refers to "the quality or state of being exposed to the possibility of being attacked or harmed, either physically or emotionally." The understanding of social and environmental vulnerability, as a methodological approach, involves ...
) 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;
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”.
In the property rights model it is the shareholder that holds the residual risk and therefore the
residual profit.
See also
*
Risk analysis (business)
Risk analysis is the process of identifying and assessing risks that may jeopardize an organization's success. It typically fits into a larger risk management framework.
Diligent risk analysis helps construct preventive measures to reduce the pr ...
*
Risk management
Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
References
External links
Residual Risk ReductionEconomist.comR3i.org
{{Authority control
Risk