Inherent risk vs residual risk: What’s the difference?

Posted on May 1, 2024 by Louise Howland

If your company has conducted a cybersecurity risk assessment you’ve probably heard the terms ‘inherent risk’ and ‘residual risk.’ Both are equally important elements of any risk assessment process designed to enhance an organisation’s cyber defences, protect data, and reduce risk profile.

With 32% of UK businesses experiencing a cyberattack or security breach during 2023, the need for effective risk management remains a top priority across all industries. This is where inherent risk and residual risk play a vital role in helping companies assess and understand their own risk level.

This article will explore the topic of inherent risk vs residual risk and explain the key difference between the two.

What does inherent risk mean?

Inherent risk refers to the level of risk that exists when there are no internal security controls in place. Therefore, it stands to reason that inherent risks are avoidable with the right security measures in place. Without these measures, inherent risks can snowball into even greater problems that can weaken a company’s security defences and leave systems exposed to cyberattacks.

The good news is that because inherent risks are preventable, identifying them is essential when conducting thorough risk analysis. That way not only can the threat of inherent risk be eliminated, but steps can also be taken to bolster any weak spots that may exist in an organisation’s cyber defences.

What is an example of inherent risk?

Perhaps the most common example of inherent risk in cybersecurity is the misuse of data and sensitive information. Companies that lack protocols and robust processes for accessing, storing, and sharing data either within an organisation or with outside agencies leave themselves openly exposed to security breaches. This could lead to lost or exposed customer or company data which is punishable by fines up to £17.5 million or 4% of annual global turnover in the UK. However, since this kind of risk is preventable with the right security controls, it remains an inherent risk and no more.

Similarly, the absence of security controls like multi-factor authentication on tablets, smartphones, and other devices is another example of inherent risk. This leaves every company device, network, or digital account that has access to sensitive data extremely vulnerable to a cyberattack .

What does residual risk mean?

Unlike inherent risk, residual risk cannot be fully eliminated, regardless of the security measures your company may adopt. In other words, no matter what controls you have in place, residual risk will continue to exist after all efforts have been made to reduce the inherent risk.

That said, while it’s impossible to eradicate residual risk entirely, you can still mitigate the level of risk it poses to your business. This is why it’s vital to explore ways to reduce residual risk levels, even if they can’t be fully removed.

What is an example of residual risk?

Data breaches and cybersecurity threats like malware and phishing scams are common examples of the residual risks companies face in today’s digital space. It’s one of the biggest reasons why businesses adopt robust cybersecurity solutions in order to reduce residual risk.

While effective cybersecurity can mitigate against data breaches, it won’t eliminate the possibility of third-party cyberattacks as a form of residual risk. In the same way, internal data theft is another example of cybersecurity risk that constitutes residual risk. While thorough recruitment processes like employee screening can reduce this risk, the chances of it occurring cannot be 100% eradicated.

What are the differences between inherent and residual risk?

The main difference between inherent and residual risk is whether the risk can be eliminated with the correct security controls or not. However, it’s important to understand that inherent risk is often hypothetical and refers to risk that exists when no controls are in place. On the other hand, the risk that remains once these controls are applied is the residual risk.

For instance, each time you drive your car there’s an inherent risk of hitting another car or pedestrian, damaging your vehicle, or causing injury to yourself or someone else. You can mitigate these risks and reduce the likelihood of any of these scenarios happening by introducing impact warning systems, airbags, and other safety measures.

Nevertheless, even with these safety controls, there still exists a residual risk of a car accident and the impact it may have on others. However, the presence of safety controls will still help lower the residual risk and the likelihood of an accident occurring.

How is inherent risk and residual risk calculated?

Today’s organisations are constantly seeking new ways to eliminate and reduce inherent and residual risk using the latest cybersecurity solutions. The difficult part is determining which elements present the biggest cyber threat to your networks and sensitive data, and how to reduce the potential impact of these risks once they’ve been identified.

The following 4 steps will help identify and mitigate inherent and residual risks that could have far-reaching consequences for an organisation.

1. Conduct a thorough risk assessment

Companies should perform a full risk assessment and analyse its business processes to highlight potential issues and identify risks that could weaken security defences in the case of a cyberattack. Therefore, reviewing which employees have access to systems, how data is stored, and how it is secured, is a vital part of a risk assessment.

2. Create an inherent and residual risk register

Organisations should create a risk register containing a complete list of the inherent and residual risks they face in their daily operations. This process should also include the security controls already in place to prevent these risks happening along with the likelihood and potential impact they may have.

3. Gauge the potential impact of the risks

A risk’s threat level should be considered alongside its probability and potential impact across an organisation. This will help prioritise a risk with a high probability over one with a low likelihood of risk. The potential impact should also assess the financial and reputational damage this may cause including lost assets, stolen data, as well as penalties and fines. A company’s risk tolerance and risk level should take each potential risk on individual merit so that effective safety controls can be implemented.

4. Adopt safety controls and continue to monitor risk

All inherent risks that have been identified should be mitigated with the appropriate safety controls, ideally in order or priority. These measures will typically include cybersecurity solutions, system access control, third-party risk assessments, and other safety methods. Following this, it’s also important to continually monitor risks and assess your company’s risk profile. However, this process can be difficult to manage due to the new risks that arise alongside company growth. For this reason, many companies prefer to outsource their security monitoring to a third party to protect their systems 24/7.

What inherent and residual risks do third-party vendors present?

Any third-party vendor with access to company systems and sensitive data could be a source of inherent and residual risk. Your organisation may have tight security measures in place, but if you’re working with a vendor that doesn’t, you could be highly vulnerable to a cyberattack or data breach.

Many organisations depend on vendors and service providers to manage some of their daily operations like running payroll, arranging deliveries, and supporting customers. To do this, they’ll require access to your company data, heightening the risk of a security breach.

Companies can eliminate the inherent risk associated with third-party vendors by conducting a vendor risk assessment that will help protect your assets and data when onboarding a new partner organisation. Similarly, vendors can demonstrate to their customer and stakeholders that they’re taking the necessary steps to protect and secure data by acquiring a Cyber Resilience Certification that proves they’re continually evolving in line with the latest cyber threats.

Does your company need help assessing inherent risk vs residual risk?

A cyberattack or data breach are among the biggest risks facing a business. As one of the UK’s leading providers of cybersecurity support, solution, and training, ramsac will conduct a thorough cybersecurity risk assessment to discover your inherent and residual risk. Contact us today.