How to perform a risk analysis

Risk analysis is a process that helps us understand and manage risk. Risk is any possibility of something bad happening. Risk analysis allows us to identify, analyse and assess risk so that we can make informed decisions. It involves looking at things like potential hazards or dangers, the likelihood of them happening and how serious the consequences might be if they do occur. We can then create strategies to reduce or prevent these risks from occurring in the future. A risk analysis has been critical in helping businesses protect themselves from threats throughout the years.

Difference between risk assessment and risk analysis

A risk assessment and risk analysis are both parts of risk management. A risk assessment refers to the overall process that includes risk identification, risk analysis, risk evaluation and control and risk mitigation. Risk analysis is just one step of the risk assessment. It focuses on how the assessment can be beneficial by revealing the impact risks could have if they materialise. More specifically, it focuses on:

• How likely it is for risks to happen
• How they could influence the organisation now and in the future
• How fast they could impact the company
• How severe it could be

The risk assessment is finalised once controls to minimise and mitigate the risk have been developed. The risk analysis only focuses on the four points mentioned above but assists the business to create the strategies it needs to protect itself. However, some people refer to the whole risk assessment process as ‘risk analysis’ so it can become confusing – in this article, we are referring to ‘risk analysis’ as the step in the risk assessment process where you develop a risk rating, not the whole process.

Types of risk analysis

There are several types of risk analysis that can be used to identify risk sources and evaluate risk events. These include:

• Quantitative risk analysis
• Qualitative risk analysis
• Risk benefits analysis
• Root cause analysis

Quantitative risk analysis

Quantitative risk analysis is the process of numerically calculating the likelihood of potential risks occurring and their associated impacts on a business. This type of risk analysis typically involves calculating the probability of an event occurring, its expected impact if it does occur, and its associated costs or benefits. Sensitivity analysis allows businesses to assess how changes in certain variables can affect overall risk levels while cost-benefit analyses are used to compare the costs associated with mitigating potential risks with the potential profits derived from these mitigation strategies.

Quantitative risk analysis is the process of numerically calculating the likelihood of potential risks occurring and their associated impacts on a business. This type of risk analysis typically involves calculating the probability of an event occurring, its expected impact if it does occur, and its associated costs or benefits. Sensitivity analysis allows businesses to assess how changes in certain variables can affect overall risk levels while cost-benefit analyses are used to compare the costs associated with mitigating potential risks with the potential profits derived from these mitigation strategies.

Qualitative risk analysis

Qualitative risk analysis evaluates risk on a more subjective level than quantitative methods do by considering non-numerical elements such as interviews with stakeholders, surveys of opinions from experts in their fields, or focus groups. Risk analyses via qualitative methods help organisations better understand how people perceive risks and can provide insight into potential risks that may not be factored into quantitative analyses alone.

Risk benefits analysis

Risk-Benefits analysis is a risk management tool used to evaluate risk in terms of its potential rewards or benefits. By taking into account the risk tolerance of an organisation, risk levels can be weighed against their potential benefits to decide what action to take. This type of analysis involves considering both the financial costs associated with a risk and the potential benefits that could result from taking a risk.

Risk-Benefits analysis looks at many aspects of the risk so that organisations can make informed decisions about which risks are worth taking and which should be avoided. It also allows organisations to compare different risk scenarios by providing insight into which risks provide the greatest benefit and have the lowest financial cost. Overall, risk-benefits analysis helps organisations understand where they should focus their risk management efforts for maximum return on investment.

Root cause analysis

Root cause analysis is a risk management approach that helps organisations identify the underlying causes of risk events in order to develop more effective risk mitigation strategies. This technique examines past risk occurrences and looks for patterns and trends that can be used to identify potential risk sources. Additionally, root cause analysis can help organisations identify high-risk areas within their operations, allowing them to focus risk management efforts on these areas for better results.

By analysing root causes of risk events, companies can develop comprehensive risk management plans that take into account both financial costs associated with risk as well as potential rewards arising from taking risks. Such plans also allow organisations to recognise potential problems before they arise and respond proactively to minimise losses or damages from risk events.

How to perform a risk analysis

A risk analysis should be a structured and organised process to ensure that all risk sources are properly identified and evaluated. Some of the steps businesses can take to prepare for a risk analysis include developing risk scenarios, creating risk assessment criteria and establishing risk registers. Additionally, stakeholders should be identified and consulted to ensure that the risk analysis is comprehensive and inclusive.

Employers or the risk management team should:

• Identify the risks
• Understand different levels of likelihood
• Assess consequences and impacts of each risk
• Develop a plan for monitoring, responding to and mitigating risks

Identify the risks

When performing risk analysis, it is important to consider all risk factors that may affect your business. Risk factors can be both external and internal and they can range from economic influences such as inflation or currency fluctuations to political threats or legal risks such as changing regulations. It is also important to consider the risk of natural disasters, cybercrime, employee safety and health, customer satisfaction issues and other potential threats. By thoroughly evaluating these risk sources and their associated events in a risk analysis process, you can create strategies for mitigating them.

To accurately determine the risks involved with each risk source mentioned above, it is important to consider several key elements including probability of occurrence (how likely an event will occur), severity of impact (the degree of damage if an event does occur), time frame (when an event might happen) and controllability (if controls are available). All these are main elements of risk management.

Additionally, it is critical that stakeholders who will be affected by any potential event are identified. This will allow proper mitigation plans to be established should a threat occur. These considerations help ensure that businesses have properly considered all possible risks when analysing them for a risk management strategy.

Understand different levels of likelihood

Understanding the different levels of likelihood is an essential part of risk analysis. It involves evaluating the level of risk associated with a particular situation and how it can affect the outcome of decisions made by organisations. Risk analysis helps organisations assess risk uncertainty in terms of its potential advantages and disadvantages, allowing them to make informed decisions about which risks the company can accept, mitigate or avoid.

Assess consequences and impacts of each risk

When assessing the consequences and impacts of a risk, it is important to consider the potential financial and reputational risks. Financial risk can include the costs or potential losses due to a risk event. Reputational risk refers to the likelihood of a company’s reputation being damaged or hurt. Other risks that companies may face are social and environmental. Social risk involves assessing how a risk event may disrupt societal norms or well-being, such as loss of jobs or public safety. Environmental risk involves determining how an event may affect natural resources, ecosystems and biodiversity.

It is also necessary to consider any legal implications associated with risk events. Understanding the full scope of consequences helps organisations identify potential areas for mitigation measures as well as develop strategies for risk reduction in order to minimise any potential harm that could result from a risk event. Additionally, understanding the impacts of risk on stakeholders allows organisations to assess trade-offs between accepted and avoided risks so they can make prudent decisions about which ones will be beneficial.

Evaluate existing controls for managing identified risks

 Once risk sources have been identified and the level of risk associated with them has been assessed, businesses should evaluate existing controls for managing these risks. Evaluating existing controls involves assessing risk preventive measures and risk mitigating options that are already in place to determine their effectiveness. This process can be done through risk audits, surveys, interviews, or focus groups. Additionally, existing risk control frameworks such as ISO 31000 and COSO ERM can be used to assess current risk management processes and identify any gaps or opportunities for improvement.

Analysing risk metrics such as frequency, severity and impact of risk events can also be used to measure the effectiveness of risk controls. By evaluating existing controls, organisations can determine which ones are working well and which need to be updated or replaced in order to ensure they are adequately protecting their assets from potential threats.

Develop a plan for monitoring, responding to and mitigating risks

To effectively monitor risk, organisations should establish key performance indicators (KPIs) specific to their business environment that can be used to track the status of current threats. Additionally, organisations should develop processes for reporting risk events and categorising them based on severity so they can be tracked over time. A risk matrix can be very useful for highlighting the severity and likelihood of risks. Moreover, implementing regular internal audits or third-party assessments can also help identify potential blind spots or areas needing improvement in terms of risk management practices.

With regard to risk mitigation strategies, organisations should develop action plans for addressing both proactive and reactive measures related to identified risks. This could involve implementing processes or technologies such as data backups or software updates that reduce the likelihood of a cyberattack occurring in the first place as well as developing protocols for responding quickly when an unplanned event does occur. Organisations should also consider the costs associated with these strategies to determine which ones are most cost-effective and will provide the greatest benefit in avoiding or mitigating risks.

Important things to remember

Risk analysis is a critical step in risk management and can help organisations identify potential risk sources, assess their associated levels of risk and develop effective strategies for mitigating them. By leveraging existing risk control frameworks such as ISO 31000 and COSO ERM, setting up key performance indicators (KPIs) specific to their business environment, implementing regular internal audits or third-party assessments and developing proactive plans for responding quickly when risks do occur, companies can ensure they are adequately protecting their assets from potential threats.

Polonious takes many steps to ensure our risk management is effective so we can help our clients with their own processes. We offer streamlined risk reporting, built-in calculations for risk ratings and online risk assessments that increase productivity and reduce the risk of manual entry. Risk managers can receive automated updates and handle all risks in one place. Moreover, registers and reports can be exported easily, another element of our system that saves time and allows employees to focus on their core tasks. Do you want to know more? Request a demo!