Risk

Management

Top 20 Important Formulas of Risk Management

 Risk Risk Risk Risk
Risk Impact
Probability Exposure Severity Acceptance

Risk Risk Risk Risk

Risk Priority
Exposure Response Assessment Exposure
Number
Reduction Efficiency Value Index

Expected Risk Cost of Risk

Return on
Monetary Exposure Uncertainty Reserve
Risk (ROR)
Value (EMV) Cost (REC) (CU) (RR)

Risk Risk Break- Risk Risk

Risk Cost
Mitigation Even Point Exposure Contingency
Index (RCI)
Ratio (RMR) (RBEP) Value (REV) (RC)
 1. Risk Probability (P):

▪ Risk Probability (P) = Number of Occurrences / Total Opportunities

▪ This formula calculates the probability of a risk occurring by dividing the
number of times the risk has occurred by the total number of opportunities.
▪ For example, if a particular risk has occurred 5 times out of 20
opportunities, the probability would be 5/20 = 0.25 or 25%.

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 2. Risk Impact (I):

▪ Risk Impact (I) = Probability × Impact

▪ The risk impact formula multiplies the probability of a risk
occurring by its potential impact.
▪ For instance, if the probability of a risk is 0.4 and its impact is
assessed as 7 on a scale of 1-10, the risk impact would be 0.4 × 7 =
2.8.

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 3. Risk Exposure (E):

▪ Risk Exposure (E) = Probability × Impact × Cost

▪ Risk exposure combines the probability, impact, and cost of a risk to
determine its overall exposure.
▪ If a risk has a probability of 0.3, an impact of 6, and an estimated cost of
₹50,000, the risk exposure would be 0.3 × 6 × ₹50,000 = ₹90,000.

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 4. Risk Severity (S):

▪ Risk Severity (S) = Probability × Impact × Time

▪ The risk severity formula incorporates the probability, impact, and time
duration to evaluate the severity of a risk.
▪ For example, if a risk has a probability of 0.2, an impact of 8, and a time
duration of 4 months, the risk severity would be 0.2 × 8 × 4 = 6.4.

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 5. Risk Acceptance (RA):

▪ Risk Acceptance (RA) = Probability × Impact × (1 - Mitigation)

▪ This formula calculates the residual risk after mitigation efforts.
▪ It considers the probability, impact, and the effectiveness of mitigation
measures.
▪ If a risk has a probability of 0.5, an impact of 10, and the mitigation is
expected to reduce the risk by 30%, the risk acceptance would be 0.5 × 10
× (1 - 0.3) = 3.5.

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 Risk Exposure
6.
Reduction (RER):

▪ Risk Exposure Reduction (RER) = Risk Exposure - Residual Risk

▪ This formula measures the reduction in risk exposure achieved after
implementing mitigation strategies.
▪ If the initial risk exposure was ₹2,00,000 and the residual risk is
₹1,20,000, the risk exposure reduction would be ₹2,00,000 - ₹1,20,000 =
₹80,000.

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 Risk Response
7.
Efficiency (RRE):

▪ Risk Response Efficiency (RRE) = (Risk Exposure Reduction / Mitigation

Cost) × 100
▪ The risk response efficiency formula calculates the efficiency of a risk
response strategy by comparing the risk exposure reduction achieved to
the cost of implementing the mitigation measures.
▪ If the risk exposure reduction is ₹80,000 and the mitigation cost is
₹40,000, the risk response efficiency would be ( ₹80,000 / ₹40,000) × 100
= 200%.

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 Risk Assessment Value
8.
(RAV):

▪ Risk Assessment Value (RAV) = Probability × Impact × Detection

▪ This formula determines the risk assessment value by considering the
probability, impact, and the ability to detect the risk.
▪ For instance, if a risk has a probability of 0.3, an impact of 5, and a
detection rating of 80%, the risk assessment value would be 0.3 × 5 × 0.8
= 1.2.

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 Risk Exposure Index
9.
(REI):

▪ Risk Exposure Index (REI) = Risk Exposure / Total Asset Value

▪ The risk exposure index quantifies the risk exposure relative to the total
asset value of a project or organization.
▪ If the risk exposure is ₹80,000 and the total asset value is ₹5,00,000, the
risk exposure index would be ₹80,000 / ₹5,00,000 = 0.16 or 16%.

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 Risk Priority Number
10.
(RPN):

▪ Risk Priority Number (RPN) = Severity × Occurrence × Detection

▪ This formula is commonly used in Failure Mode and Effects Analysis
(FMEA) to prioritize risks based on severity, occurrence, and detection
ratings.
▪ If a risk has a severity rating of 8, an occurrence rating of 6, and a
detection rating of 9, the RPN would be 8 × 6 × 9 = 432.

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 Expected Monetary
11.
Value (EMV):

▪ Expected Monetary Value (EMV) = Probability × Impact

▪ EMV calculates the expected monetary value by multiplying the
probability of a risk occurrence by its financial impact.
▪ If a risk has a probability of 0.4 and an impact of ₹10,000, the EMV
would be 0.4 × ₹10,000 = ₹4,000..

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 Risk Exposure Cost
12.
(REC):

▪ Risk Exposure Cost (REC) = EMV × Risk Exposure

▪ REC represents the potential cost of a risk event by multiplying the EMV
by the risk exposure.
▪ If the EMV is ₹4,000 and the risk exposure is ₹50,000, the REC would be
₹4,000 × ₹50,000 = ₹200,000,000.

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 Cost of Uncertainty
13.
(CU):

▪ Cost of Uncertainty (CU) = Risk Exposure × (1 - Probability)

▪ This formula calculates the cost of uncertainty by multiplying the
risk exposure by the complement of the risk probability.
▪ If the risk exposure is ₹1,00,000 and the probability is 0.2, the cost
of uncertainty would be ₹1,00,000 × (1 - 0.2) = ₹80,000.

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 14. Risk Reserve (RR):

▪ Risk Reserve (RR) = Risk Exposure × Contingency Percentage

▪ Risk reserve is the amount of funds set aside as a contingency for risks.
▪ The risk reserve is calculated by multiplying the risk exposure by the
contingency percentage.
▪ If the risk exposure is ₹50,000 and the contingency percentage is 10%, the
risk reserve would be ₹50,000 × 0.1 = ₹5,000.

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 15. Return on Risk (ROR):

▪ Return on Risk (ROR) = (Expected Return - Expected Cost) / Risk

Exposure
▪ ROR measures the return on investment in relation to the risk exposure.
▪ It is calculated by subtracting the expected cost from the expected return
and dividing the result by the risk exposure.
▪ If the expected return is ₹1,50,000, the expected cost is ₹1,00,000, and the
risk exposure is ₹5,00,000, the ROR would be (₹1,50,000 - ₹1,00,000) /
₹5,00,000 = 10%.

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 Risk Mitigation Ratio
16.
(RMR):

▪ Risk Mitigation Ratio (RMR) = (Initial Risk - Residual Risk) / Initial Risk
▪ RMR calculates the risk mitigation ratio by subtracting the residual risk
from the initial risk and dividing the result by the initial risk.
▪ If the initial risk is 200 and the residual risk is 50, the RMR would be (200
- 50) / 200 = 0.75 or 75%.

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 Risk Break-Even Point
17.
(RBEP):

▪ Risk Break-Even Point (RBEP) = Risk Mitigation Cost / (Expected Loss -

Residual Loss)
▪ RBEP identifies the point at which the cost of risk mitigation is equal to
the difference between expected loss and residual loss.
▪ If the risk mitigation cost is ₹1,00,000, the expected loss is ₹3,00,000, and
the residual loss is ₹1,00,000, the RBEP would be ₹1,00,000 / ( ₹3,00,000
- ₹1,00,000) = 0.5 or 50%.

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 Risk Exposure Value
18.
(REV):

▪ Risk Exposure Value (REV) = Probability × Impact × Cost of

Impact
▪ REV determines the exposure value of a risk by multiplying the
probability, impact, and the cost associated with the impact.
▪ If a risk has a probability of 0.3, an impact rating of 7, and a cost of
impact of ₹5,000, the REV would be 0.3 × 7 × ₹5,000 = ₹10,500.

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 19. Risk Cost Index (RCI):

▪ Risk Cost Index (RCI) = Cost of Risk / Project Budget

▪ RCI measures the proportion of the project budget allocated to
cover risk costs.
▪ If the cost of risk is ₹50,000 and the project budget is ₹5,00,000,
the RCI would be ₹50,000 / ₹5,00,000 = 0.1 or 10%.

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 20. Risk Contingency (RC):

▪ Risk Contingency (RC) = Probability × Impact × Contingency

▪ Reserve RC calculates the amount of contingency reserve required for a
risk by multiplying the probability, impact, and the predetermined
contingency reserve.
▪ If a risk has a probability of 0.4, an impact of ₹20,000, and a contingency
reserve of ₹10,000, the RC would be 0.4 × ₹20,000 × ₹10,000 =
₹80,000,000.

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