What does 'residual risk' mean?

Residual risk refers to the level of risk that remains after an organization has taken steps to manage or mitigate identified risks. This concept is vital in risk management because, even after implementing controls or taking preventive measures, it is often impossible to eliminate all risks completely. Therefore, understanding the notion of residual risk helps organizations recognize that they must accept some degree of risk as part of their operations.

In practice, once an initial risk assessment is conducted and measures are in place, organizations need to evaluate how effective those measures are in reducing the identified risks. The remaining risks, which are not eliminated but rather acceptably reduced to a manageable level, are classified as residual risks. This concept is essential for effectively balancing risk tolerance with risk management strategies, allowing organizations to make informed decisions about their risk exposure and resources.

By focusing on this retained risk, organizations can prioritize ongoing monitoring and reassessment of their risk management strategies, ensuring they remain effective and responsive to emerging threats or changes in the operational environment.