How do you quantify the impact of a risk event on your business objectives?

Yes yes yes! So glad to see this as #1 in a LinkedIn ERM article. There are many methods and approaches to identifying, assessing, quantifying/qualifying and treating risks....but if your mission critical objectives are not the starting point, what you are doing is not ERM.

Define clear business objectives with explicit goals and targets, measuring performance through key indicators and metrics to assess success and impact of risk events.

I agree with other comments that it is important to focus on "risk impacts" and not "risk events". For example, cyber attacks, hurricanes, airplanes crashing into sites, etc., could be concerning "risk events" for any organization. However, if, for example, you have a critical objective that hinges on having a strong pipeline of specialized talent, then managing or treating the aforementioned "risk events" is likely to have little effect on that objective. That is not to say that understanding of and preparedness for such events is not necessary or beneficial, but too often this becomes a disproportioned focus of time and resources, leaving other risks poorly evaluated and, thus, mission critical objectives subject to unexpected impact.

First LOD has ultimate ownership for read across assessments of identified issues, risk events and its impact. Three key stakeholders – Risk Owners, Control Owners and Control Officers. Risk Owners are accountable for identifying, assessing, managing and reporting key existing and emerging risk events that they own for their business or function in line with the risk appetite set by the Board while Control Owners are accountable for operating controls on behalf of Risk Owners / Business Service Owners, and for the control monitoring processes to assess and report control effectiveness. Chief Control Officers (CCO) are accountable for driving the effective governance and management of non-financial risks in the First LOD.

Enterprise Risk Management involves quantifying the impact of risk events on business objectives through a structured process. Steps include defining objectives clearly, identifying relevant risk events, assessing their likelihood and impact, calculating risk exposure, comparing and prioritizing risks, and monitoring and reviewing the process. It is important to consider various factors such as data quality, model validity, accuracy, and human bias when using risk simulations in ERM. By addressing these challenges effectively, organizations can enhance their risk management processes and achieve their strategic goals.

A prerequisite for anyone opting for any OOTB CAPA solution, a Clustered heatmap or Correlogram visualization for Impact Vs Likelihood

Translating niche-type risks, such as cyber risks, into a broader business language can help ensure that mitigation initiatives align with the organization's overriding objectives. Cyber risk quantification can do just that - transforming complex risk terminology and KPIs into the likelihood an organization will experience a specific event, coupled with the respective financial damages. Once equipped with these figures, organizations can much more easily determine how cyber risks are going to impact the overall business goals, allowing them to take action accordingly (i.e., adjust their risk appetite and invest in mitigation initiatives). Ultimately, effective assessments depend on discussing all aspects of risk in a common language.

Adopting an on-demand cyber risk quantification tool is the most efficient and effective way to accurately assess both the likelihood of experiencing various cyber events and the respective potential financial consequences. Using these monetary insights, business leaders can create a dedicated ERM strategy that accurately represents the organization's financial exposure. Key stakeholders can determine risk appetite and tolerance levels that align with reality, and budget-makers can likewise utilize these insights to allocate an adequate amount of resources to be spent on cyber risk mitigation or transfer. Quantification doesn't have to be such a complex process. With on-demand CRQ, it's not!

Assess the likelihood and impact of risk events on objectives using different scales and methods such as qualitative, quantitative, or hybrid approaches. Consistency and transparency in assessing likelihood and impact are essential, with options like rating systems or numerical values for both factors.

When assessing risks, consider both the likelihood and impact of each risk event on your objectives. Likelihood refers to the probability of occurrence, while impact relates to the extent of the effect. Utilize various methods like qualitative, quantitative, or hybrid approaches with rating systems or numerical values to assess likelihood and impact consistently and transparently.

Two ways to calculate risk exposure:- 1. Quantitative Analysis: For certain types of risks, especially financial risks, you can conduct quantitative analysis to estimate the potential financial impact. This might involve techniques such as scenario analysis, sensitivity analysis, or Monte Carlo simulations. 2. Qualitative Analysis: For risks that are harder to quantify, you may need to rely more on qualitative analysis. This could involve expert judgment, historical data analysis, or industry benchmarks. Bonus tip: Try to use as much data as possible when applying qualitative analysis don't rely on individual judgement which could be biased.

Quantifying the risk and exposure of various risks—especially cyber risks—requires leveraging probabilistic models to produce a range of possible event likelihoods and respective financial consequences. Having access to the full range of probabilities allows for custom scenario planning, which is particularly important within the cyber risk landscape as it evolves rapidly. It's also crucial to keep in mind that, for high-accuracy results, cyber risk modeling must incorporate OBJECTIVE data. If the model is fed subjective information, the chances of misappropriating resources and leaving the organization vulnerable to impactful events are high.

The guidance provided for this topic starts with “Calculate” and speaks of “multiplication”, “formulas”, and “averages.” This is guidance for operational risks and not strategic risks. The more strategic the risk, the less likely quantitative measurement is practical. If something is highly measurable and predictable, it is an operational risk. If the risks are strategic, uncertainty to achieve strategic objectives, risk exposure will be more qualitative. Also, beware of the trap of believing that quantitative measurements are free of biases. Organizations are led by people with their own opinions and agendas. KPIs, KRIs, and scorecards can all be ‘gamed’ to influence outcomes. Quantitative is great but be careful.

As described simple way to put it is. Risk Exposure = Impact * Likelihood Working on recent project with a world's leading bank I learned that Risk exposure is assessed using a combination of qualitative and quantitative methods. Qualitative assessment involves identifying and analyzing potential risks and their potential impact on the organization. Quantitative assessment consists of quantifying the economic or operational impact of a risk, determining the probability of occurrence, and calculating the expected level of exposure.

Calculate the risk exposure of each risk event by multiplying the likelihood and impact, representing potential loss or gain for objectives. Use various formulas like simple multiplication, weighted average, or scenario analysis based on the risk event and objective type. Ensure a valid and reliable calculation method for each risk event.

To effectively manage risk, compare and prioritize risk events based on their impact on objectives using tools like risk matrix, map, scorecard, or dashboard. These tools visually represent the severity and importance of risks, aiding in decision-making on where to focus attention and action. Establish a clear and objective method for comparing and prioritizing risk events.

With a cyber risk quantification (CRQ) platform, comparing and prioritizing cyber risks becomes a relatively straightforward process. Instead of having to assess various numbers and colors (as you would in a heat map or risk matrix), CRQ provides the figures necessary to know which of the potential events will have the greatest overall impact on the business. For example, with CRQ, an organization may discover they have a 25% chance of suffering from a ransomware event that's going to cost them, on average, $17 million. The CRQ tool could also show them they have a 12% likelihood of experiencing a data breach event that, on average, would cause a $5 million loss. The quantified figures make the prioritization process relatively easy.

Regularly monitor and assess the impact of risk events on objectives, comparing actual occurrences with initial assessments. Update objectives, risk events, likelihood, impact, and exposure periodically, adjusting actions accordingly for a dynamic and responsive risk management approach.

Manage risks not events. Risk management is about managing risks. And preventing them from becoming events. Yes, we all do incident and issue management. But minimising this is doing risk management well.

To quantify risk impact: 1.Define objectives:Clearly outline your key business goals. 2.Identify risks:Brainstorm potential threats that could hinder these goals. 3.Assess impact:Evaluate each risk's potential consequences on each objective (e.g., financial loss, reputational damage, project delays). Use scales (low, medium, high) or specific metrics (e.g., cost, time). 4.Estimate likelihood:Assign a probability of each risk occurring (e.g., high, medium, low) based on historical data, industry trends, or expert judgment. 5.Prioritize risks:Multiply impact and likelihood scores to identify high-priority risks requiring immediate attention and mitigation strategies.