In the risk management domain, it is very important to understand the distinction between inherent risk and residual risk in order to develop control strategies. Although both terms are concerned with certain levels of risk, they refer to distinct workings of the risk management processes. Inherent risk is the level of threat that exists when no controls are applied.
On the other hand, residual risk is one that is left after the application of controls and mitigation measures. The comparison of inherent and residual risks also helps organisations in decision-making, resource allocation, and the overall strengthening of operational resilience.
What is inherent risk?
Inherent risk is the risk when there exists no internal control to do anything about it. It can be imagined as a preventable situation if only one applies the right security control. In absence thereof, it can become a large issue. An inherent risk can be prevented through risk control; inherent risks are an essential part of risk analysis. After all, this approach gives more realised value to preventing risks rather than accepting those that are unavoidable.
What is residual risk?
No matter what steps your company takes, leftover risks cannot be totally eliminated. These are dangers that will persist regardless of the implemented measures. Although you cannot totally avoid residual risks, you can lower their degree of risk. This highlights the need to think about ways to lower your present risk level even if you can't get rid of residual hazards totally.
What’s the difference between inherent risk vs. residual risk?
Organisations often experience attacks when they have controls in place, and some of those attacks slip through the net of cybersecurity that’s been set up. Consider an attacker who discovers a vulnerability even while products are patched often or an employee who succumbs to a social engineering attack despite having been taught to detect emails. In information security, that's the distinction between intrinsic and residual risk.
Alternatively, you have erected a fence surrounding your data and networks to exclude risk; although that fence is keeping most of the danger out, some may yet slip through. Despite the greatest attempts of your team, that risk sneaking in is residual risk.
It should be underlined that these interpretations can become somewhat unclear. Most companies now are not working without any cybersecurity controls. Identifying intrinsic risk as "the present risk level given the existing set of controls. In this more realistic scenario, residual risk represents the remaining risks once additional controls are applied.
How do you calculate inherent risk and residual risk?
Companies nowadays deal with a great spectrum of hazards, both inherent and residual risks. However, with so many possible risk sources floating around, how do you decide which ones pose the greatest threat to your company? And, perhaps even more importantly, how can businesses minimise the probability and possible effect of the hazards they see? Five actions follow that will assist you in finding and lowering the inherent and residual risks of your firm.
1) Make a risk assessment.
Your company and its operations are carefully examined in a risk assessment to find possible problems that may threaten your company. By learning proven risk assessment techniques and precautionary measures, the British Academy for Training and Development offers the Risk Assessment and Necessary Precautions course.
One main pillar of a risk assessment is examining how your data is stored, who has access to it, and how it is protected. Still, there is a wide spectrum of other risk variables you might have to take into account depending on the precise kind of your company and its procedures.
2) Create a risk register.
Risk registers list the particulars of the inherent and remaining hazards your company confronts together with the measures in place to stop them. Ideally, your risk register should also include information on each documented risk's likelihood and potential impact, which brings us to the next step in the risk assessment process.
3) Consider the chances and possible effects of hazards.
Without thinking about a risk's probability and possible effects, you cannot ascertain its danger degree. Beginning with probability, a high-likelihood risk is far more serious than a low-likelihood risk (presuming everything else is equal). At the same time, the possible effect calculates the effect on your company should the risk come true.
This comprises direct financial losses, lost assets, and other effects, including reputational harm and flouting of regulatory standards. You must carefully assess the probability and consequences of every risk you identify to establish your company's risk appetite and current risk level. Once you have this analysis, you may start ranking hazards to determine which finally pose the most danger to your organisation.
4) Prioritise risks
Once you have assessed the probability and possible consequences of every detected risk, you may give top priority to risks depending on these two criteria. Highest priority goes to risks with a great probability of occurring or an exceptionally expensive influence. Low-probability or low-impact risks, on the other hand, do not have to be handled with as much speed.
Your company should be able to create the controls necessary to reduce all the hazards you find. But in the real world, corporate leaders frequently have to make tough decisions on how best to distribute their money. Prioritising your company's risks according to probability and impact lets you concentrate available resources on the risks that are most critical to solve.
5) Implement controls and continuously monitor risk.
From most to least priority, any natural hazards you discover should be reduced using the appropriate risk controls. Depending on the exact risks you hope to mitigate, this can include controls such as cybersecurity programmes, role-based access control, vendor risk assessments, and a great number of others.
It is imperative to constantly evaluate hazards and your company's risk profile in addition to putting the controls necessary to remove inherent risks into action. One of the challenging aspects of risk management is that risks often evolve rather than remain still.
As your business expands, new risks may present themselves; those now threatening your firm could decrease as new measures become accessible. Regular risk assessments will help you to remain current with your company's hazards by letting you constantly watch risk.
Why is inherent risk important?
Knowing natural threats and their consequences enables security teams to pinpoint which cybersecurity measures will be most effective against the current level of risk and risk components pertaining to your company. You will never be able to successfully reduce and avoid new threats and flaws emerging unless you have a solid knowledge of the natural dangers your company encounters. The first step in establishing a successful cybersecurity strategy is to appreciate the natural dangers of your company.
Why is residual risk important?
From a compliance perspective, it's crucial to understand remaining risk; the ISO 27001 standards demand that businesses monitor residual risk, that is, the security of assets entrusted to an organisation by third parties allowing them to manage it. Companies need residual security checks as well as inherent security measures in order to comply with ISO 27001.
On a more fundamental level, security teams concentrating just on inherent risk are neglecting the complete picture when it comes to knowing their company's risk profile, and this can cause bad decisions relating to security. Good security teams understand that erecting a fence does not mean you have removed all danger; something that is unattainable. There always remains some risk. Attackers could dash against the fence; a tiny item may pass; or perhaps something will get above the fence.
Regularly monitoring and understanding residual risk as well as inherent risk enables security experts to more rapidly and precisely detect possible security threats and grasp how those threats could harm a business and its data. Understanding how and when dangers could go past the fence allows a security team or CISO to react with assurance to hazards.
Understanding inherent and residual risk in third-party risk management
Common sources of both inherent and residual risk are third-party providers that can see your company's sensitive data. Working with a vendor without the right procedures in place could leave you open to many hazards even if your company's security measures are robust. For most businesses, this turns a third-party risk management programme into an absolutely essential tool in lowering the risk profile.
Conducting thorough vendor risk assessments is among the best ways to remove the inherent risk in third-party vendors. However, 44% of companies claim that manually doing vendor compliance evaluations is the most challenging aspect of third-party risk management. Using our cutting-edge compliance platform, businesses can send automated vendor risk evaluations and compliance surveys. By simplifying the vendor procedure, this helps to protect your business from fresh risks.