Risk assessment

Risk assessment is the identification of hazards that could negatively impact an organization's ability to conduct business. These assessments help identify these inherent business risks and provide measures, processes and controls to reduce the impact of these risks to business operations.

Companies can use a risk assessment framework (RAF) to prioritize and share the details of the assessment, including any risks to their information technology (IT) infrastructure. The RAF helps an organization identify potential hazards and any business assets put at risk by these hazards, as well as potential fallout if these risks come to fruition.

In large enterprises, the risk assessment process is usually conducted by the Chief Risk Officer (CRO) or a Chief Risk Manager.

Risk assessment steps

How a risk assessment is conducted varies widely depending on the risks unique to the type of business, the industry that business is in and the compliance rules applied to that given business or industry. However, there are five general steps that companies can follow regardless of their business type or industry.

Step 1: Identify the hazards. The first step in a risk assessment is to identify any potential hazards that, if they were to occur, would negatively influence the organization's ability to conduct business. Potential hazards that could be considered or identified during risk assessment include natural disasters, utility outages, cyberattacks and power failure.

Step 2: Determine what, or who, could be harmed. After the hazards are identified, the next step is to determine which business assets would be negatively influenced if the risk came to fruition. Business assets deemed at risk to these hazards can include critical infrastructure, IT systems, business operations, company reputation and even employee safety.

Step 3: Evaluate the risks and develop control measures. A risk analysis can help identify how hazards will impact business assets and the measures that can be put into place to minimize or eliminate the effect of these hazards on business assets. Potential hazards include property damage, business interruption, financial loss and legal penalties.

Step 4: Record the findings. The risk assessment findings should be recorded by the company and filed as easily accessible, official documents. The records should include details on potential hazards, their associated risks and plans to prevent the hazards.

Step 5: Review and update the risk assessment regularly. Potential hazards, risks and their resulting controls can change rapidly in a modern business environment. It is important for companies to update their risk assessments regularly to adapt to these changes.

Risk assessment tools, such as risk assessment templates, are available for different industries. They might prove useful to companies developing their first risk assessments or updating older assessments.

How to use a risk assessment matrix

A risk assessment matrix, as shown in the example above, is drawn as a grid with one axis labeled "likelihood" and the other axis labeled "consequence." Each axis progresses from "low" to "high."  Each event is plotted on one line in terms of its low to high likelihood. On the other line, the event is plotted on one line in terms of its low to high consequence. Where they meet determines the plot point on the matrix.