A popular way to visualise risk is to create a ‘heat map’ consisting of a colour coded 5 x 5 grid that enables the Likelihood and Impact of a risk to be plotted. High risks are shown in red and low risks are shown in green. It can provide a simple and compelling way to explain the nature of the risks facing an organisation.
However, what a heat map is unable to show is the range of losses that could be incurred. For example, in the case of Tatton Hill Academy, there is an 82% chance the Academy would spend £10,000, a 29% chance it would spend £20,000 and a 1.34% chance that it will end up spending £45,000.
The Loss Exceedance Curve (LEC), illustrated below, is used in actuarial science, nuclear power and engineering. It shows how a range of losses are possible and that larger losses are less likely than smaller ones. It also enables the effect of inherent risk and residual risk to be visualised. Inherent risk is the risk that an activity would pose if minimal controls or other mitigating factors were in place. Residual Risk is the risk that remains after additional controls are taken into account.
Tatton Hill’s Senior Leadership team believe that its new HR Recruitment and Retention strategy will reduce its risk of having to rely on recruitment agencies for permanent teaching staff. Consequently, the Academy is judged to have a 48.7% chance of spending £10,000. a 17.2% chance of spending £20,000 and a 0.8% chance of spending £40,000.