What determines how risks should be ranked?

The ranking of risks is fundamentally based on the impact and likelihood of their occurrence. This approach is crucial in risk management because it allows organizations to prioritize their responses to various risks in a logical manner. By evaluating both the impact—how severe the consequences would be if the risk were to materialize—and the likelihood—how probable it is that the risk will actually occur—organizations can effectively allocate resources, mitigate potential harms, and develop strategic plans that align with their overall risk tolerance.

Other factors such as the financial status of the organization, the number of employees, or historical performance metrics may contribute to the overall context in which risk management takes place, but they do not serve as the primary criteria for ranking risks. These factors can provide valuable background information or influence the decision-making process, but they do not fundamentally change the importance of evaluating both the severity and probability of the risk itself in establishing an effective risk management strategy.