Risk assessments involve systematically identifying, analyzing, and evaluating potential risks to minimize their impact on an organization. This article describes into the three main stages of risk assessment—risk identification, risk analysis, and risk evaluation—while also exploring both quantitative and qualitative approaches to assessing risk.
Stage 1: Risk Identification
During the risk identification phase, organizations strive to pinpoint potential adverse events that could undermine their security objectives. This essential first step involves a detailed understanding and cataloging of the organization's assets, which could range from physical equipment and technology infrastructure to intangible assets like intellectual property and brand reputation.
Key Elements in Risk Identification:
Assets: Organizations must first identify what they need to protect. This includes all valuable resources, from hardware and software to data and human resources.
Vulnerabilities: The next step is to recognize weaknesses in the system that could potentially be exploited. This includes software flaws, procedural shortcomings, and inadequate security measures.
Existing Controls: Evaluating the current security measures and processes in place helps to determine their effectiveness and identify areas that require enhancement.
Threat Landscape: Understanding the external and internal threats that exist in the environment in which the organization operates. This includes everything from cyber threats and corporate espionage to natural disasters and internal misconduct.
With this comprehensive understanding, organizations can effectively identify the risks and the associated negative consequences and impacts. This lays the groundwork for a robust risk management process, ensuring that all potential threats are accounted for and appropriately addressed in the subsequent phases of risk analysis and evaluation.
Stage 2: Risk Analysis
Once risks have been identified, they must be analyzed to determine their likelihood and impact. This analysis can be conducted through either quantitative or qualitative methods.
Quantitative Risk Analysis
Quantitative analysis involves the use of numerical values to estimate the probability and impact of risks. A common technique used is the calculation of the Annual Loss Expectancy (ALE).
ALE is calculated as:
ALE = Single Loss Expectancy (SLE) × Annual Rate of Occurrence (ARO)
For example, if a data breach could cost a company $100,000 (SLE) and is expected to occur once every five years (ARO = 0.2), the ALE would be:
ALE = $100,000×0.2 = $20,000ALE = $100,000×0.2 = $20,000
This calculation can help organizations better understand the potential annual cost of risks, guiding them in prioritizing risks based on their potential financial impact.
Qualitative Risk Analysis
This method assesses risks based on their severity and likelihood without assigning numerical values. Risks are categorized into levels such as high, medium, or low based on their potential impact and probability of occurrence.
In this example you can see a risk matrix consisting of two dimensions. Impact, and probability. Each dimension has a scale indicating the severity of the impact and the likelihood of the risk.
Stage 3: Risk Evaluation
In the final phase, organizations evaluate the analyzed risks to determine which ones need immediate attention and resources. This decision-making process involves comparing risk levels against the organization’s risk appetite and threshold levels to prioritize management efforts.
In this example an organisation has determined that the blue and black risk levels are not are acceptable. Therefore all risks that are outside of the risk appetite need to be treated in a way that either reduces the likelihood or the impact of the risk scenario.
