What is Risk Analysis?

Risk analysis is one of the stages in the companies’ risk management process, which consists of assessing the probability of a hazard occurring and calculating its possible impact and loss for the corporation.

This step occurs after the identification of the potential dangers to which the corporation is exposed. The risk analysis aims to not only estimate possible operational losses, but mainly to prevent them from happening.

This is the case, for example, with the analysis of occupational safety risks, also called task risk analysis. It aims to prevent accidents that could endanger the physical integrity or the lives of workers or third parties, in addition to the property itself. Another example is the analysis of environmental risk, which works to prevent the occurrence of events that are the responsibility of the company that harm the environment.

Risk analysis, however, is not only done for accidents. In a credit risk analysis, for example, the possibility of those taking a loan being unable to repay it is assessed. The analysis of financial risks, in a broader way, makes the estimates of possible losses, for example, in the case of an investment.

What is a risk?

A risk is the possibility of an event occurring that can cause damage to a company. These damages can be human – such as accidents involving employees -, property, financial, image, among others.

Unlike danger, which is the source of potential damage, risk presupposes a measurement of the chance of this event occurring and an estimate of its severity. For example, an earthquake is a danger. The chance of an earthquake occurring in a given location and its impacts is the risk. If a locality has buildings adapted for the occurrence of earthquakes, for example, the risk of damage will be less, even if the danger is the same.

Types of risk

There are two general categories of risks: pure risks and speculative risks.

Speculative risks are those arising from decision-making that can result in both gains and losses. This is the case, for example, with an investment. In this type of risk, there is a difficulty in accurately calculating the result of a decision or event. Speculative risks can be:

  • Administrative: involve decision making. They are divided into market risks, financial risks and production risks;
  • Political: they are related to the political stability of the market in which we operate. It includes, for example, changes in legislation;
  • Innovation: encompasses issues related to technological evolution, which can both promote gains for the company and make its products and methods obsolete.

Pure risks are those in which there is no possibility of profit for the company, that is, their consequences will always be negative. This is the case, for example, with accidents. Pure risks are divided according to their type of threat and can be:

  • Property risks: this category includes damage to equipment, fires, thefts and other events that may have consequences for the company’s assets;
  • Risks to people: includes diseases and accidents at work that threaten the physical integrity or the lives of workers;
  • Liability risks: includes events that may lead to the payment of indemnities to third parties, such as environmental risks, accidents caused by problems in the quality or safety of the products offered, etc.

What is risk analysis for?

Assessing the chance of an event occurring and its possible consequences is essential to establish a prevention strategy that prioritizes the most likely or potentially most serious risks.

It will tell you what measures need to be taken to avoid the problem, in addition to helping to establish emergency plans. It can also be used, for example, to assess the need to take out insurance to cover possible losses.

In order for this classification of priority risks to be carried out, the risk analysis must use criteria for the classification and classification of events.

Risk classification

Risk analysis makes a company’s risk classification taking into account the organization’s needs and its strategy models. The two main classifications involve the chance that the risk will occur and the severity of its impact.

Risk probability

This analysis considers the chance that a harmful event will occur. It can classify risks into:

  • Extremely remote: The chance that a given event will happen is more theoretical than practical.
  • Remote: These are unexpected, but possible occurrences.
  • Unlikely: Classification that includes occurrences that, despite their low probability, cannot be ignored.
  • Probable: It is expected to occur at least once during the operation.
  • Frequent: It is believed that it will happen several times during the operation.

Severity of risks

A risk can be classified according to the severity of its consequences. The severity of the effects of a given event can be divided into:

  • Catastrophic: It is the highest classification on the scale. In the case of accidents with workers, it includes death or total disability. It also includes irreparable damage to the environment, high financial losses, total loss of equipment or facilities, among others.
  • Criticism: These are events that generate serious injuries and disabilities in workers, partial loss of equipment, serious damage to facilities to the environment and major financial losses.
  • Marginal: It can lead to a slight partial disability in the injured worker, slight damage to the company’s equipment or facilities. In the case of damage to the environment, these are easy to recover, and the financial losses caused by the event are small.
  • Despicable: Include events that are not harmful to the environment, but that can cause slight damage to equipment or minor injuries to a worker, with immediate return to work after medical attention.

The greater the probability of an event occurring and the severity of its consequences, the more priority the investment in preventing this risk will be.