4 Examples of Residual Risk
John Spacey, updated on March 27, 2021
Residual risk is the risk that remains after you have treated risks. Risk management involves treating risks meaning that a choice is made to avoid, reduce, transfer or accept each individual risk. It is difficult to completely eliminate risk and normally there is a residual risk that remains after each risk has been managed. The following are a few examples of residual risks.
1. Risk AvoidanceA business decides to avoid the risk of developing a new technology because the project has many risks. The residual risk is that a competitor will develop the technology instead and the business will become less competitive.
2. Risk ReductionAn airline reduces the risk of an accident by improving maintenance procedures. Residual risks remain in the process including a chance of human error such as skipping steps in the procedure.
3. Risk TransferA homeowner transfers the risk of flood damages to their home by getting flood insurance. Residual risks include the insurance deducible amount and the chance that the insurance company will go bankrupt as the result of a large scale flood and fail to pay.
4. Risk AcceptanceWhen a risk is accepted, the entire risk becomes a residual risk. For example, an investor may accept the risk that a stock will go down because they predict that the potential rewards of the investment outweigh the risks.
RiskThis is the complete list of articles we have written about risk.
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A reasonably complete guide to project risk management.
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