ACCA SBL Syllabus D. Risk - Assess The Severity And Probability Of Risk - Notes ^{7 / 9}

Risk assessment is the process of evaluating the importance of a risk by making an estimate of two variables:

1. The probability of the risk event being realised

   Probability refers to the likelihood of the risk materialising and is expressed either as a percentage or as a proportion of one (e.g. a 0.5 risk is considered to be 50% likely).

2. The impact that the risk would have if it were realised

   The impact refers to the value of the loss if the risk event were to materialise.

The estimated values of these two variables can be plotted on a risk assessment ‘map’, where the two axes are impact and probability (see below).

Then, different risk management strategies can be assigned depending upon the area of the map the risk is plotted in.

• ACCEPT (LOW - LOW)

  Risks assessed at low probability and low impact can be accepted or tolerated

• TRANSFER (HIGH - LOW)

  Those with high impact but low probability are often transferred or shared. 
  Insure risk or implement contingency plans. 

  Reduction of severity of risk will minimise insurance premiums.

• MONITOR (LOW - HIGH)

  Risks with low impact but high probability are typically reduced

• AVOID (HIGH - HIGH)

  Those with high impact and high probability are typically avoided. 

  Take immediate action to reduce severity and frequency of losses, e.g. charging higher prices to customers or ultimately abandoning activities.

Board Evaluation of risk

Depends on:

• Risk appetite of company

• Maximum risk a business can take (capacity)

• Risk that can’t be managed (residual risk)