Risk classification

Risk classification
See also
Risk identification Insurance risk Cost risk Strategic risk Operational impact Business segment Dynamic risk Business concept Risk evaluation

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 :

• 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:

• 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:

• 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.

References

• Acharya V.V., Pedersen L.H., Philippon T., Richardson M. (2016), Measuring Systemic Risk "The Review of Financial Studies", Volume 30, Issue 1, January 2017, Pages 2–47
• Cummins J.D., Smith B.D., Vance R.N., Vanderhel J.L.(2013), Risk Classification in Life Insurance Springer Science & Business Media, LLC
• Gupta A. (2013), Risk management and Simulation CRC Press Inc., New York
• Hoodat H,Rashidi H. (2009), Classification and Analysis of Risks in Software Engineering World Academy of Science, Engineering and Technology 32, p. 446-452
• Howarth I. C. (1988), The relationship between objective risk, subjective risk and behaviour "Ergonomics", 31:4, 527-535
• Renn O. (1992), Concepts of risk: a classification Krimsky, Sheldon (Hrsg.): "Social theories of risk". Westport, Conn. : Praeger. - ISBN 0-275-94168-X, S. 53-79

Author: Natalia Kobos