Single Value
The basic calculation for risk exposure is based on an estimate of the probability of a risk and its impact.risk exposure = probability × impact
For example, if there is a 20% chance of a product failing on the market and the impact will cost you $1 million.
risk exposure = 0.20 × $1,000,000 = $200,000
It should be noted that risk exposure as presented here isn't the maximum cost of the risk but the probable cost.
For example, if there is a 20% chance of a product failing on the market and the impact will cost you $1 million.
risk exposure = 0.20 × $1,000,000 = $200,000
Discrete
Many risks are too complex to model with a single estimate of probability and impact. In this case, a risk exposure can be measured with a matrix of discrete probabilities. For example, a product might have several different possible levels of failure on the market:
Continuous
Risk exposure can also be modeled as a continuous curve whereby a probability is given for every possible loss. For example, a product failure that can cost at most $200,000 can be modeled with a probability for every possible dollar amount such as a 0.0004% chance of a $10,000 loss and a 0.0003999% chance of a $10,001 loss.
Maximum
Risk exposure can also measure the maximum impact of a risk regardless of probability. This makes sense where you want to limit the worst case.Fire risk exposure related to the facility has been capped at the insurance deductible of $10,000 plus an estimated $40,000 in costs not covered by insurance.
| Overview: Risk Exposure | ||
Type | ||
Definition (1) | An estimate of the probable costs of a risk or set of risks for a period of time. | |
Definition (2) | An estimate of the maximum costs of a risk or set of risks for a period of time. | |
Related Concepts | ||
