Risk matrices are widely used in the process industries. Details as to their design and implementation vary considerably from company to company, particularly with regard to the size of a risk matrix, but generally a process such as the following is used.
- A hazard is identified.
- The consequence of that hazard is determined. The most important consequence is usually do with safety, but environmental, economic and public relations impact can also be considered.
- The projected frequency (not probability) of occurrence is determined, usually in events per thousand years, but sometimes - as in the case of batch processes - events per thousand operations. Sometimes two levels of frequency are considered: with and without safeguards.
- A value for overall risk is assigned. Steps 2 through 4 are often managed with three matrices such as those shown below.
The Risk Matrix shows that risk levels are divided into categories shown.
Level 'A' (red) is "Stop the bus right now". A hazard of high consequence and high frequency has been identified. Immediate corrective action is needed.
Level 'B' (orange) shows a high level of risk; action must be taken within say 90 days.
Level 'C' (yellow) represents moderate risk. Action must be taken within say 18 months. (In practice, the difference between 'B' and 'C' is that items at the 'C' level can wait for the next scheduled turnaround.)
Level 'D' represents a low level of risk - action must be taken, but time is not of the essence.
There are other categories that can be used. These include:
- 'O' - Operational;
- 'L' - Low Hanging Fruit; and
- 'S' - Standards
In spite of their widespread use, risk matrices have limitations, some of which are described below.
- 'A' Risk not Realistic
Red square risks have such a low likelihood that, were they to exist, we would be having major events on an on-going basis. Since such events occur very rarely that part of the matrix is hardly used.
- 'D' Risk Ignored
Green square events tend also to be ignored.
- Upper Right Corner
High consequence/low predicted frequency events are also mostly ignored. "Could an airplane crash into our facility? It's not going to happen - move on" (but see the comment below about being ready for black swans).
Risk management professionals constantly struggle with the concept of "acceptable risk". Some companies place a diagonal line across the matrix and require that all items on the unacceptable side of the line must be modified so that they become acceptable. But the decision as to where the line is to be located is a subjective one.
- Estimates of Frequency/Probability
The value that people assign to the likelihood of an event occurring varies enormously and is particularly dependent on whether they have actually experienced such an event. A related difficulty, particularly when matrices with many rows and columns are used, is the potential for confusing precision with accuracy.
. . .