Risk classification

From CEOpedia | Management online

Risk classification is a categorization of identified risks based on factors such as: probability of its occurrence, estimated costs, hypothetical impact or amount of required countermeasures.

A systematic classification of risk approaches can relate to on of the following categories [1]:

  • Actuarial approach,
  • Probabilistic risk analysis,
  • Economics of risks,
  • Psychology of risk,
  • Social theories of risk,
  • Cultural theory of risk.

Examples of risk classifications

There are multiple ways to classify risks across listed above categories, but the most common classifications include:

Important classification related to possible alternatives to current situation[2]:

  • Pure risk - which can have only two possible outcomes: complete loss or no loss at all. That is a type of risk that cannot be controlled. Within pure risk we can determine: personal risks, legal risks, operational risks, liability risks, property risks.
  • Speculative risk - impact of speculative risk can be both: loss or gain. Within speculative risks we can determine: liquidity risks, reputational risks, business risks, strategic risks, credit risks, market risks (e.g. currency, equity).

Due to the range of risk hypothetical impact:

  • Fundamental risk - tend to affect a wide range of factors,
  • Particular risk - affects individual factors.

Similar classification related to impact on people involved:

  • Systemic risk - probability of risk threats (loss or failure) common to entire group or system
  • Unsystemic risk - not common to entire system.

Classification that distinguishes risks related to enterprise functioning:

  • Invariable risk - concerns whole economic system (by taking into consideration factors like inflation level, unemployment level etc.),
  • Variable risk - concerns the given organization (e.g. bankruptcy, strike).

Classification related to organization development related decisions[3]:

  • Project risk - concerns technical aspects of project realization,
  • Organization risk - related to the wrong assessment of future market conditions by the investing company,
  • Owners risk - in the case of owners decisions that do not aim to diversify the company's development.

Classification that is referring to risk threats of losses:

  • Financial risk - risks of incurring financial losses that can be easily countable,
  • Non financial risk - it has no direct impact on financial losses but has negative consequences in the social and natural environment.

Other risk classifications:

  • Economic and non-economic risk,
  • Quantifiable and non-quantifiable risk,
  • Static and dynamic risks.

Footnotes

  1. Concepts of risk: a classification 1992, p. 57
  2. Risk management and Simulation 2013, p. 6-11
  3. Classification and Analysis of Risks in Software Engineering, p. 447


Risk classificationrecommended articles
Insurance riskTotal riskRisk identificationStrategic riskCost riskChange management in projectRisks and uncertaintiesTOWS analysisScenarios of states in environment

References

Author: Natalia Kobos