Residual risk

The residual risk is the amount of risk or danger associated with an action or event remaining after natural or inherent risks have been reduced by risk controls.^[1]

The general formula to calculate residual risk is

{\text{residual risk}}=({\text{inherent risk}})-({\text{impact of risk controls}})

where the general concept of risk is (threats × vulnerability) or, alternatively, (severity × probability).

An example of residual risk is given by the use of automotive seat-belts. Installation and use of seat-belts reduces the overall severity and probability of injury in an automotive accident;^[2] however, probability of injury remains when in use, that is, a remainder of residual risk.

In the economic context, residual means “the quantity left over at the end of a process; a remainder”^[3]

In the property rights model it is the shareholder that holds the residual risk and therefore the residual profit.

References

^ Gregory Monahan (2008). Enterprise Risk Management: A Methodology for Achieving Strategic Objectives. John Wiley & Sons.
^ "Seat Belts: Get the Facts". Motor Vehicle Safety. Centers for Disease Control. 20 August 2015. Retrieved 2016-02-15.
^ "dictionary.com". {{cite web}}: Missing or empty |url= (help)