What is risk exposure in business?
Risk exposure is the quantified potential loss from business activities currently underway or planned. The level of exposure is usually calculated by multiplying the probability of a risk incident occurring by the amount of its potential losses.
Risk exposure in business is often used to rank the probability of different types of losses and to determine which losses are acceptable or unacceptable. Losses may include legal liability, property loss or damage, unexpected employee turnover, changes in demand, payment of ransom to cybercriminals, or other activity that could result in either a profit or a loss for the business.
The objective of the risk exposure calculation is to help determine the overall level of risk the organization can tolerate based on the benefits and costs involved. The level of risk an organization is prepared to accept to achieve its goals is called its risk appetite.
What are the different categories and types of risk exposure?
There are two primary categories of risk exposure: pure risk and speculative risk.
Pure risk exposure is a risk that cannot be wholly foreseen or controlled, such as a natural disaster or global pandemic that impacts an organization's workforce. Most organizations are exposed to at least some pure risks, and preemptive controls and processes can be created that minimize loss, to some degree, in these pure risk circumstances.
Speculative risk is a type of risk that occurs based on actions an organization takes -- and their subsequent consequences. Examples of speculative risk might be the choice of a software platform that is later susceptible to critical vulnerabilities or a choice to keep all backups on-site, which are later infected by ransomware.
There are many different types of risk exposure, but the most common include the following:
- Brand damage. Organizations incur brand damage when the image of the brand is undermined or made obsolete by events. These events range from customer service failures to outages, breaches or other types of cybersecurity issues.
- Compliance failures. Compliance risk is an organization's potential exposure to legal penalties, financial forfeiture and material loss, resulting from its failure to act in accordance with industry laws and regulations, internal policies or prescribed best practices.
- Security breaches. Security breaches are significant avenues of risk exposure, especially if sensitive stolen data is posted online for others to access.
- Liability issues. Organizations can be liable legally for a wide range of transgressions. These could include cybersecurity issues like breaches, data exposure, failure to meet service-level agreements and many more.
How do you calculate risk exposure?
To calculate risk exposure, analysts often use an equation similar to this:
Risk exposure = probability of risk occurring x total loss of risk occurrence
Here is another simpler way of describing this equation:
Risk exposure = risk impact x probability
Thus, organizations must know the total loss in dollars, as well as a percentage representing the probability of the risk occurring. For example, an organization might have a 50% likelihood of being hit by ransomware (0.5 probability); the impact is determined as $2 million in recovery, consulting fees and loss of revenue (this is a complicated metric for impact). In a simple risk exposure equation, this would work out to:
Risk exposure = risk impact ($2,000,000) x probability (0.5)
Risk exposure = $1,000,000
While this equation is admittedly simple, it could serve as a baseline indicator for prioritizing risk in risk mitigation programs.
How do you manage risk exposure?
The following techniques and tactics are commonly used by organizations to manage risk exposure:
- Risk avoidance. Organizations can alter choices and decisions to avoid risky activities.
- Risk mitigation. Controls and processes can be implemented that help mitigate and minimize risk in many different areas.
- Risk transfer. Through insurance and third-party service arrangements, organizations can transfer some risk to outside parties.
- Risk retention. Organizations can always choose to accept risk and accommodate it as part of ongoing operations.