Risk Management

July 28th, 2012 Risk Management

Risk management is activity directed towards the assessing, mitigating (to an acceptable level) and monitoring of risks. In some cases the acceptable risk may be near zero. Risks can come from accidents, natural causes and disasters as well as deliberate attacks from an adversary.

Risk Management is the process which aims to help organisations understand, evaluate and take action on all their risks with a view to increasing the probability of their success and reducing the likelihood of failure.

Risk management gives comfort to stakeholders (shareholders, customers, employees and so on) that the business is being effectively managed and helps the organisation confirm its compliance with corporate governance requirements.

Risk Management is relevant to all organisations whether they are in the public or private sector, or whether they are large or small. It should form part of the culture of the organisation, with an effective policy and programme led by top management with clear responsibilities laid down for every manager and employee to be involved in the management of risk. It supports accountability, performance measurement and reward thus promoting efficiency at all levels.

Risk management requires a detailed knowledge and understanding of the organisation and the processes involved in the business. As well as internal specialists there is a huge number of different advisers and consultants providing support to an organisation's risk management programme. Because of this, risk management is a truly multi-disciplinary profession.

In businesses, risk management entails organized activity to manage uncertainty and threats and involves people following procedures and using tools in order to ensure conformance with risk-management policies. Risk management is also used in the public sector to identify and mitigate risk to critical infrastructure. For the most part, these methodologies consist of the following elements, performed, more or less, in the following order.

1. Identify assets and identify which are most critical

2. Identify, characterize, and assess threats

3. Assess the vulnerability of critical assets to specific threats

4. Determine the risk (i.e. the expected consequences of specific types of attacks on specific assets)

5. Identify ways to reduce those risks

6. Prioritize risk reduction measures based on a strategy

The strategies include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk. Some traditional risk management programs (e.g., health risk assessment) are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, ergonomics, death and lawsuits). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments.

Principles of Risk Management

The International Organization for Standardization identifies the following principles of risk management:

1. Risk management should create value.

2. Risk management should be an integral part of organizational processes.

3. Risk management should be part of decision making.

4. Risk management should explicitly address uncertainty.

5. Risk management should be systematic and structured.

6. Risk management should be based on the best available information.

7. Risk management should be tailored.

8. Risk management should take into account human factors.

9. Risk management should be transparent and inclusive.

10. Risk management should be dynamic, iterative and responsive to change.

11. Risk management should be capable of continual improvement and enhancement.

Process of Risk Management

According to the standard ISO/DIS 31000 "Risk management — Principles and guidelines on implementation" , the process of risk management consists of several steps as follows:

1. Establishing The Context

Establishing the context involves:

– Identification of risk in a selected domain of interest

– Planning the remainder of the process.

Mapping out the following:

– the social scope of risk management

– the identity and objectives of stakeholders

– the basis upon which risks will be evaluated, constraints.

– Defining a framework for the activity and an agenda for identification.

– Developing an analysis of risks involved in the process.

– Mitigation of risks using available technological, human and organizational resources.

2. Identification

After establishing the context, the next step in the process of managing risk is to identify potential risks. Risks are about events that, when triggered, cause problems. Hence, risk identification can start with the source of problems, or with the problem itself.

Source analysis Risk sources may be internal or external to the system that is the target of risk management. Examples of risk sources are: stakeholders of a project, employees of a company or the weather over an airport.

Problem analysis Risks are related to identified threats. For example: the threat of losing money, the threat of abuse of privacy information or the threat of accidents and casualties. The threats may exist with various entities, most important with shareholders, customers and legislative bodies such as the government.

When either source or problem is known, the events that a source may trigger or the events that can lead to a problem can be investigated. For example: stakeholders withdrawing during a project may endanger funding of the project; privacy information may be stolen by employees even within a closed network; lightning striking a Boeing 747 during takeoff may make all people onboard immediate casualties.

The chosen method of identifying risks may depend on culture, industry practice and compliance. The identification methods are formed by templates or the development of templates for identifying source, problem or event. Common risk identification methods are:

Objectives-based risk identification Organizations and project teams have objectives. Any event that may endanger achieving an objective partly or completely is identified as risk.

Scenario-based risk identification In scenario analysis different scenarios are created. The scenarios may be the alternative ways to achieve an objective, or an analysis of the interaction of forces in, for example, a market or battle. Any event that triggers an undesired scenario alternative is identified as risk.

Taxonomy-based risk identification The taxonomy in taxonomy-based risk identification is a breakdown of possible risk sources. Based on the taxonomy and knowledge of best practices, a questionnaire is compiled. The answers to the questions reveal risks.

Common-risk checking In several industries lists with known risks are available. Each risk in the list can be checked for application to a particular situation.

Risk charting (risk mapping) This method combines the above approaches by listing Resources at risk, Threats to those resources Modifying Factors which may increase or decrease the risk and Consequences it is wished to avoid. Creating a matrix under these headings enables a variety of approaches. One can begin with resources and consider the threats they are exposed to and the consequences of each. Alternatively one can start with the threats and examine which resources they would affect, or one can begin with the consequences and determine which combination of threats and resources would be involved to bring them about.

3. Assessment

Once risks have been identified, they must then be assessed as to their potential severity of loss and to the probability of occurrence. These quantities can be either simple to measure, in the case of the value of a lost building, or impossible to know for sure in the case of the probability of an unlikely event occurring. Therefore, in the assessment process it is critical to make the best educated guesses possible in order to properly prioritize the implementation of the risk management plan.

The fundamental difficulty in risk assessment is determining the rate of occurrence since statistical information is not available on all kinds of past incidents. Furthermore, evaluating the severity of the consequences (impact) is often quite difficult for immaterial assets. Asset valuation is another question that needs to be addressed. Thus, best educated opinions and available statistics are the primary sources of information. Nevertheless, risk assessment should produce such information for the management of the organization that the primary risks are easy to understand and that the risk management decisions may be prioritized. Thus, there have been several theories and attempts to quantify risks. Numerous different risk formulae exist, but perhaps the most widely accepted formula for risk quantification is:

Risk = Rate of occurrence * The impact of the event

Later research has shown that the financial benefits of risk management are less dependent on the formula used but are more dependent on the frequency and how risk assessment is performed.

In business it is imperative to be able to present the findings of risk assessments in financial terms. Robert Courtney Jr. (IBM, 1970) proposed a formula for presenting risks in financial terms. The Courtney formula was accepted as the official risk analysis method for the US governmental agencies. The formula proposes calculation of ALE (annualised loss expectancy) and compares the expected loss value to the security control implementation costs (cost-benefit analysis).

4. Potential Risk Treatments

Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories:

- Avoidance (eliminate)

- Reduction (mitigate)

- Transfer (outsource or insure)

- Retention (accept and budget)

Ideal use of these strategies may not be possible. Some of them may involve trade-offs that are not acceptable to the organization or person making the risk management decisions. Another source, from the US Department of Defense, Defense Acquisition University, calls these categories ACAT, for Avoid, Control, Accept, or Transfer. This use of the ACAT acronym is reminiscent of another ACAT (for Acquisition Category) used in US Defense industry procurements, in which Risk Management figures prominently in decision making and planning.

5. Risk Avoidance

Includes not performing an activity that could carry risk. An example would be not buying a property or business in order to not take on the liability that comes with it. Another would be not flying in order to not take the risk that the airplane were to be hijacked. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits.

6. Risk Reduction

Involves methods that reduce the severity of the loss or the likelihood of the loss from occurring. For example, sprinklers are designed to put out a fire to reduce the risk of loss by fire. This method may cause a greater loss by water damage and therefore may not be suitable. Halon fire suppression systems may mitigate that risk, but the cost may be prohibitive as a strategy. Risk management may also take the form of a set policy, such as only allow the use of secured IM platforms (like Brosix) and not allowing personal IM platforms (like AIM) to be used in order to reduce the risk of data leaks.

Modern software development methodologies reduce risk by developing and delivering software incrementally. Early methodologies suffered from the fact that they only delivered software in the final phase of development; any problems encountered in earlier phases meant costly rework and often jeopardized the whole project. By developing in iterations, software projects can limit effort wasted to a single iteration.

Outsourcing could be an example of risk reduction if the outsourcer can demonstrate higher capability at managing or reducing risks. In this case companies outsource only some of their departmental needs. For example, a company may outsource only its software development, the manufacturing of hard goods, or customer support needs to another company, while handling the business management itself. This way, the company can concentrate more on business development without having to worry as much about the manufacturing process, managing the development team, or finding a physical location for a call center.

7. Risk Retention

Involves accepting the loss when it occurs. True self insurance falls in this category. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. All risks that are not avoided or transferred are retained by default. This includes risks that are so large or catastrophic that they either cannot be insured against or the premiums would be infeasible. War is an example since most property and risks are not insured against war, so the loss attributed by war is retained by the insured. Also any amounts of potential loss (risk) over the amount insured is retained risk. This may also be acceptable if the chance of a very large loss is small or if the cost to insure for greater coverage amounts is so great it would hinder the goals of the organization too much.

8. Risk Transfer

In the terminology of practitioners and scholars alike, the purchase of an insurance contract is often described as a "transfer of risk." However, technically speaking, the buyer of the contract generally retains legal responsibility for the losses "transferred", meaning that insurance may be described more accurately as a post-event compensatory mechanism. For example, a personal injuries insurance policy does not transfer the risk of a car accident to the insurance company. The risk still lies with the policy holder namely the person who has been in the accident. The insurance policy simply provides that if an accident (the event) occurs involving the policy holder then some compensation may be payable to the policy holder that is commensurate to the suffering/damage.

Some ways of managing risk fall into multiple categories. Risk retention pools are technically retaining the risk for the group, but spreading it over the whole group involves transfer among individual members of the group. This is different from traditional insurance, in that no premium is exchanged between members of the group up front, but instead losses are assessed to all members of the group.

9. Create a Risk-management Plan

Select appropriate controls or countermeasures to measure each risk. Risk mitigation needs to be approved by the appropriate level of management. For example, a risk concerning the image of the organization should have top management decision behind it whereas IT management would have the authority to decide on computer virus risks.

The risk management plan should propose applicable and effective security controls for managing the risks. For example, an observed high risk of computer viruses could be mitigated by acquiring and implementing antivirus software. A good risk management plan should contain a schedule for control implementation and responsible persons for those actions.

According to ISO/IEC 27001, the stage immediately after completion of the Risk Assessment phase consists of preparing a Risk Treatment Plan, which should document the decisions about how each of the identified risks should be handled. Mitigation of risks often means selection of security controls, which should be documented in a Statement of Applicability, which identifies which particular control objectives and controls from the standard have been selected, and why.

10. Implementation

Follow all of the planned methods for mitigating the effect of the risks. Purchase insurance policies for the risks that have been decided to be transferred to an insurer, avoid all risks that can be avoided without sacrificing the entity's goals, reduce others, and retain the rest.

11. Review and Evaluation of The Plan

Initial risk management plans will never be perfect. Practice, experience, and actual loss results will necessitate changes in the plan and contribute information to allow possible different decisions to be made in dealing with the risks being faced.

Risk analysis results and management plans should be updated periodically. There are two primary reasons for this:

- to evaluate whether the previously selected security controls are still applicable and effective, and

- to evaluate the possible risk level changes in the business environment. For example, information risks are a good example of rapidly changing business environment.