My keyword research revealed questions about risk management that remain unanswered online. For some of the questions that did have answers, I didn;t fully agree with explanations I found. There where also questions to which I had no idea what the answer was, even after studying and working with safety and risk for over 10 years. So it also provided a good learning opportunity for me.
This post compiles risk questions with to the point answers. Feel free to leave any suggestions for improvements in the comments.
What is Risk?
Risk has multiple definitions across different fields and standards. At the University of Stavanger, the prevailing definition of risk is “consequences and associated uncertainties.”
According to ISO 31000, risk is defined as “the effect of uncertainty on objectives.” This definition intentionally covers both positive and negative deviations from what is expected.
The Committee of Sponsoring Organizations (COSO) defines risk as the “possibility that events will occur and affect the achievement of strategy and business objectives.” This definition evolved from their earlier 2004 version that focused only on adverse effects, now encompassing both positive and negative impacts.
Different industries approach risk with varying emphases:
- In finance: risk typically refers to the volatility of returns and potential financial loss
- In safety management: risk centers on accident likelihood and severity of harm
- In project management: risk encompasses any uncertain event that could affect scope, schedule, cost, or quality
The fundamental elements across all definitions include uncertainty and its potential impact on objectives.
What is a Hazard?
A hazard is defined as a source with the potential to cause harm. This definition is consistent across safety standards and regulations worldwide.
In workplace contexts, a hazard is often described as a condition, object, activity, or circumstance that can cause injury or illness. According to ISO 45001, the international standard for occupational health and safety management systems, a hazard is defined as a “source with the potential to cause injury and ill health.”
Examples of hazards in workplace settings include slippery floors, exposed electrical wiring, or malfunctioning machinery. In environmental contexts, hazards might include pollution sources, toxic substances, or natural phenomena like earthquakes, floods, and volcanic eruptions.
What’s the Difference Between a Risk and a Hazard?
The key distinction between risk and hazard is fundamental to effective risk management:
- A hazard is a potential source of harm
- A risk is the consequence and the associated uncertainties
To illustrate this difference: a sharp knife in a kitchen is a hazard – it has the inherent potential to cause a cut. The risk, however, is the probability of someone actually cutting themselves while using the knife, combined with the potential severity of that cut.
A hazard can exist without presenting a significant risk if the likelihood of exposure or harm is low, or if effective control measures are in place. For example, a bottle of bleach stored securely in a locked cupboard (hazard) poses a lower risk of harm than the same bottle left open on a kitchen counter accessible to children.
Understanding this distinction enables more targeted risk management strategies that either eliminate the source of harm (the hazard) or reduce the likelihood and impact of potential negative outcomes (the risk).
What is Vulnerability?
Vulnerability refers to the degree to which a system, asset, or individual is susceptible to the negative effects of a hazard or risk. It represents a weakness or gap that can be exploited, potentially amplifying the consequences when a risk materialises.
Vulnerability can be categorised in several ways:
- Technical vulnerability: Such as outdated software with security flaws
- Physical vulnerability: Like buildings located in flood-prone areas
- Social vulnerability: Including factors such as poverty, lack of education, or limited access to resources
In cybersecurity, a computer system running outdated software is vulnerable to malware attacks. The outdated software is the vulnerability, while the potential malware attack is the risk associated with the hazardous activity of using the internet.
Similarly, in natural disaster contexts, communities with poor infrastructure or inadequate emergency preparedness are more vulnerable to hurricanes or earthquakes. This increased vulnerability can significantly magnify the impact of hazards when they occur.
What’s the Difference Between Safety and Security?
While both safety and security are concerned with protection, they address fundamentally different types of threats:
- Safety focuses on protecting against unintentional harm or accidents
- Security is concerned with protecting against intentional harm
For example, safety regulations in a workplace might mandate the use of personal protective equipment to prevent accidental injuries. In contrast, security measures might include surveillance systems and access controls to prevent theft or unauthorised entry.
In today’s interconnected world, particularly in areas like information technology and Industry 4.0, the distinction between safety and security has become increasingly blurred. A security breach in a critical infrastructure system, for instance, could have significant safety implications, highlighting the need for integrated risk management approaches.
Risk vs. Compliance
Compliance and risk management are interconnected but distinct concepts.
Compliance refers to the adherence to laws, regulations, standards, and internal policies. It is a crucial aspect of responsible operation for any organisation.
Compliance, while essential, does not necessarily encompass all aspects of risk management. Risk management takes a broader view, considering a wider range of potential threats and opportunities that compliance requirements may not explicitly address.
A robust risk management framework can drive compliance efforts by identifying areas where non-compliance poses a significant risk to the organisation’s objectives, reputation, or sustainability. This approach transforms compliance from a checkbox exercise into a strategic component of organisational resilience.
What is a Risk Assessment?
A risk assessment is a systematic process for identifying potential hazards and risks, analysing their consequences and associated uncertainties, and evaluating them to determine appropriate control measures.
How to Conduct a Risk Assessment?
Conducting a risk assessment involves a systematic process with well-defined steps:
- Risk identification
- Risk analysis
- Risk evaluation
What is a Risk Premium?
A risk premium is the additional return an investor expects to receive above a risk-free rate of return to compensate for the uncertainty associated with a particular investment. It represents the extra yield or profit that investors demand for taking on higher levels of risk.
The size of the risk premium is typically correlated with the perceived level of risk; higher-risk investments generally require a higher risk premium to attract investors.
Are Risk Assessments Required by Law?
In many jurisdictions, risk assessments are a legal requirement, particularly for employers to ensure the safety and health of their employees in the workplace.
For example, in the Netherlands, employers are legally obligated to conduct a Risk Inventory and Evaluation (RI&E) under the Dutch Working Conditions Act to identify workplace risks and develop an action plan to mitigate them.
At the European Union level, the OSH Framework Directive requires employers to carry out risk assessments. Furthermore, specific EU legislation in sectors like consumer products and artificial intelligence also mandates risk assessment processes.
Beyond general workplace safety, risk assessments are also legally required in specific sectors, such as healthcare, where regulations like HIPAA in the United States mandate thorough risk analyses to protect patient information.
What is a Risk Factor?
A risk factor is a characteristic, condition, or behaviour that increases the likelihood of a negative outcome, such as developing a disease or experiencing an accident.
In health contexts, smoking is a well-known risk factor for lung cancer, and obesity is a risk factor for heart disease. In project management, a risk factor is a situation that may induce project risks, increasing the chances of something hindering the project’s objectives, such as a lack of prior experience with similar projects.
In safety management, risk factors are characteristics at the biological, psychological, family, community, or cultural level that are associated with a higher likelihood of negative outcomes like injuries or accidents.
It’s important to note that risk factors are often correlational, meaning they are associated with an increased likelihood, but they are not always directly causal. Identifying risk factors helps organisations move from vague concerns to specific, actionable issues that can be monitored and addressed.
Are Risk Factors and Causes the Same Thing?
While the terms are related, risk factors and causes are not always synonymous.
A cause directly brings about a condition or effect. For instance, specific viruses or bacteria are the cause of certain infectious diseases. Causes establish a direct causal relationship with the outcome.
A risk factor, on the other hand, is a defined occurrence or characteristic that has been associated with an increased rate of a subsequently occurring disease or negative outcome. Causality may or may not be implied with a risk factor.
For example, while smoking is a direct cause of many cases of lung cancer, age is a risk factor for many diseases; it increases the likelihood of occurrence but does not directly cause the disease in the same way a pathogen does.
Are Risk Factors and Etiology the Same?
Etiology, particularly in medicine, refers to the cause or origin of a disease or condition. While risk factors can contribute to the etiology of a disease by increasing an individual’s susceptibility or exposure to causative agents, they are not always the direct cause themselves.
For example, the etiology of influenza is the influenza virus. However, risk factors like a weakened immune system, exposure to crowded environments, or lack of vaccination can increase the likelihood of contracting the virus and developing the disease.
What is a Risk Register?
A risk register, also known as a risk log or risk database, is a crucial risk management tool used to identify, document, track, and manage potential risks. It serves as a central repository for information about identified risks.
The elements of a risk register are closely related to how we define and operationalise risk.
Are Risk Registers Still Relevant?
While some studies have noted potential pitfalls if risk registers are not used effectively (e.g., becoming a bureaucratic exercise without leading to action), they are still relevant as they provide the backbone for the risk management system.
How to Calculate Risk?
The Risk Factor Formula
The calculation of risk is fundamentally tied to how we define risk itself. The risk factor formula serves as the foundation for any risk assessment methodology and directly reflects the risk definition used by the risk assessor. Different risk problems require different risk factor formulas, and selecting the appropriate formula depends on the unique characteristics of the risk scenario being analysed.
Traditional Risk Formula
The most common risk factor formula is:
Risk = Probability × Consequence
This formulation originated from expected value theory in economics and probability theory and represents risk as the product of how likely an event is to occur and the severity of its impact (Schmidt, 2016). This formula embodies a risk-neutral perspective, treating all combinations with the same product as equivalent, regardless of whether they represent high-probability/low-consequence or low-probability/high-consequence events.
Alternative Risk Factor Formulas
Depending on the risk context, several alternative formulas may be more appropriate:
Risk = Hazard + Vulnerability
Used in some state and regional risk assessments, particularly for natural disasters, this additive model emphasises the inherent dangers and weaknesses in a system (Mamuji & Etkin, 2019).
Risk = (Hazard Exposure × Vulnerability) / Coping Capacity
This formula incorporates resilience aspects by recognising that the same hazard may pose different risks depending on the system’s ability to cope (Vaezi et al., 2024).
Risk = Probability × Impact × Changing Risk
Used in dynamic risk environments, this formula acknowledges that risk factors may evolve over time due to climate change or mitigation actions (Vaezi et al., 2024).
Risk = Probability × Consequence / Resilience
This approach explicitly integrates resilience into risk assessment, recognising that well-prepared systems face effectively lower risk levels than unprepared ones facing the same hazard (Vaezi et al., 2024).
Selecting the Appropriate Formula
The choice of risk factor formula should be guided by:
1. The Nature of the Risk Problem
- Stable, well-understood risks: The traditional P×C formula may be sufficient
- Complex, interdependent risks: Formulas incorporating vulnerability and resilience are more appropriate
- Evolving risks: Formulas that account for changing risk profiles are needed
2. Available Data
- Quantitative data availability: Determines whether probabilistic approaches are feasible
- Historical evidence: Influences whether frequentist or knowledge-based probability measures are more appropriate
3. Decision-Making Context
- Resource allocation decisions: May require formulas that account for cost-effectiveness
- Safety-critical contexts: May prioritise formulas that prevent underestimation of catastrophic risks
4. Stakeholder Risk Attitudes
- Risk-averse contexts: May require formulas that give higher weight to severe consequences
- Balanced approaches: Traditional P×C formulation assumes risk neutrality
Practical Implications
The choice of risk factor formula directly influences:
- Which risks are prioritised
- How resources are allocated
- What mitigation strategies are developed
For example, using a formula that incorporates resilience might shift focus toward improving preparedness for risks that cannot be eliminated, while traditional approaches might focus solely on reducing probability or consequence.
By carefully selecting the risk factor formula that best aligns with the specific characteristics of the risk problem at hand, risk assessors can ensure their calculations provide meaningful information that supports effective decision-making.
Which Risk Assessment Tool to Use?
Tool selection depends on context, industry, and risk complexity. Common options include:
- Risk matrix/heat map: Visual representation of risks based on likelihood and impact
- SWOT/PESTLE analysis: Strategic tools identifying broader threats and opportunities
- Failure Mode and Effects Analysis (FMEA): Detailed examination of potential failures and consequences
- Bowtie model: Visual mapping of causes, risk events, and consequences
- What-If analysis: Scenario-based brainstorming of potential risks
- Hazard and Operability (HAZOP) analysis: Structured identification of process hazards
- Decision trees: Analysis of potential outcomes from different choices
Risk to Reward Ratio?
The risk-to-reward ratio compares potential gains against potential losses. It’s calculated by dividing potential reward by potential risk: Risk-to-Reward Ratio = Potential Reward ÷ Potential Risk
Lower ratios (e.g., 1:3) indicate greater potential reward relative to risk. This concept helps evaluate investment attractiveness and project options.
Which Risks Can Be Insured?
Insurance transfers potential financial losses to an insurer for a premium. Generally, insurable risks are:
- Predictable in aggregate
- Random for individuals
- Quantifiable in potential loss
Common insurable risks include property damage, liability claims, business interruption, cyber incidents, and professional indemnity.
However, strategic risks (market demand changes), reputational damage, and certain regulatory penalties typically cannot be insured. The boundary between insurable and uninsurable risks continues to evolve, with parametric insurance and new models expanding coverage options.
Risk is the Result of?
Risk fundamentally results from uncertainty. Several factors contribute to this uncertainty:
- Change: Technological, market, regulatory, or organizational shifts create new unknowns
- Complexity: Interconnected systems make it difficult to anticipate all potential failure points
- Human factors: Error, decision biases, and behavioral variability introduce uncertainty
- External events: Economic trends, natural disasters, and geopolitical shifts create unpredictability
- Information gaps: Incomplete or inaccurate data leads to flawed risk assessment
Threat vs. Hazard
While sometimes used interchangeably, threats and hazards differ importantly:
- A hazard is a source of potential harm (an unsecured server room)
- A threat is something that can exploit a vulnerability (a malicious actor attempting unauthorized access)
The relationship is sequential: hazards present vulnerabilities, which threats exploit, creating risk. Understanding these distinctions helps develop targeted mitigation strategies addressing both potential harm sources and trigger agents.
What is a Risk Matrix?
A risk matrix is a visual tool for analyzing and prioritizing risks based on likelihood and impact. Typically presented as a grid, one axis represents occurrence probability (very low to very high) while the other shows potential impact severity (negligible to catastrophic).
See this blogpost for how to make a risk matrix
See this blogpsot for alternative risk visualisations
How to Visualize Risk
The visualization choice depends on risk type, audience sophistication, and communication purpose. View this blopost for more suggestions.
What is Risk-Neutral Probability?
Risk-neutral probability is a theoretical concept used in financial modeling for derivative pricing. Rather than reflecting actual event probabilities, it’s an adjusted probability distribution assuming all assets earn the risk-free rate.
This adjustment removes risk aversion impact from asset prices, creating a framework for consistent derivative pricing. It’s a key component in option pricing models like Black-Scholes, determining fair option values based on underlying assets, expiration timing, volatility, and risk-free interest rates.
Closing comments
What risk management questions do you still have?
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