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Risk management
Risk management

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3.1 How to quantify impact

There are a number of different approaches that can be used to quantify the impact of risk. This section takes a look at some of the most common approaches and discusses their limitations.

  • Models – Financial models that calculate the impact are often used. These are particularly helpful where there is a history of information about the risk and how often it occurs. Models can then be constructed, based on historical observations, to predict the future level of risk. It is important when using models to know whether the model is being used to extrapolate (i.e. predict results beyond the data the model is based on).
  • Scenarios – Scenarios are similar to financial models but can be used to assess risks that are new and/or are yet to happen. The scenario will define a set of assumptions about the nature of the risks; these assumptions will then be used to assess the risk’s impact.
  • History – Impact of risks can be based on actual information on risks that have occurred. For example, last time the machine cost 10% more than forecast so the risk is future machines will cost 10% more than forecast.
  • Expert opinion – In certain circumstance there may be no historical information to fall back on. It may be that the venture or the circumstance is so novel than no comparable or relevant information exists. In such situations it is common to solicit expert opinion. It is recommended that, where possible, the assumptions made by the experts when giving their opinion are captured – these can then be revisited over time to ensure the assumptions (and therefore the assessment) are still valid.

Best practice is to be able to show how the assessment was arrived at and, in particular, what assumptions have been made.