Risk classification

Risk classification
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Methods and techniques

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[edit]

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 (eg. 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 (eg. 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[edit]

  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

References[edit]

Author: Natalia Kobos