Updated July 14, 2023
What is Event Risk?
The term “event risk” refers to the possibility that an unexpected event will adversely impact an asset, organization, sector, etc., resulting in a loss that has to be borne by the investors and other stakeholders.
Although these events are unpredictable, it is still possible to reduce the impact of these events by setting up suitable risk assessment and management processes. Insurance is one of the most common tools for hedging any event risk.
Explanation
Sometimes businesses face unforeseen events that significantly impact their operational or financial risk profile. The vulnerability of businesses to any unexpected event is known as the event risk. The source of an event risk may be specific to a company or industry or something completely unrelated, such as a natural disaster. Some examples of event risk pertaining to corporate actions include leveraged buyouts, hostile takeovers, corporate restructuring, merger &acquisition, etc.
Example of Event Risk
Now, let us look at some of the events that happened in the past and see what their economic impact was.
Example #1
The disaster of Chornobyl on April 26, 1986, consider one of the worst nuclear disasters in human history. It left a long-lasting impact on the entire world, both in terms of social and economic. The disaster resulted in the contamination of as much as 150,000 square miles of area spread across Ukraine, Russia, and Belarus. At the same time, its economic impact breached $700 billion over the next three decades.
Source: University of South California
Example #2
The terrorist attack on September 11, 2001, was another colossal external event that shook businesses worldwide, especially the airline industry, which incurred huge losses. According to Air Transport Association, the 4-day shut down immediately after the 9/11 attack resulted in revenue losses of $1.4 billion for the airline industry. Even after resuming services, the industry incurred losses as many travelers avoided flying.
Source: Federation of American Scientists (Page 35)
Types of Event Risk
The event risks can broadly categorize into the following four types:
- Opportunity Risk: This type of risk refers to losing an opportunity while pursuing a different option. For instance, when a company opts for an option from two or more mutually exclusive choices, it lets go the remaining opportunities. There is a likelihood that the best option was among the options that were not pursued, which is known as opportunity risk.
- Risk of Uncertainty: This type of risk pertains to the risk of uncertain events that can potentially influence the smooth operations of a company. These risks usually originate out of nowhere, and thus they can’t control due to, but the damages done by them can reduce through insurance. Examples of uncertain events include fire outbreaks, natural calamities, market downfall, terrorist attacks, political unrest, etc.
- Risk of Hazards: This type of risk occurs due to poor workplace management or improper handling of harmful material, eventually resulting in hazardous events that may severely injure some workforces. Some sources of the hazardous events are biological/ chemical hazards or inappropriate allocation of responsibilities.
- Operational Risk: This type of risk refers to the risk that associates with day-to-day business activities. These risks usually occur due to the failure of processes, policies, or systems. It considers to be one of the direct risks as it arises out of the daily operations, which are typically critical for the smooth functioning of the business.
How to Minimize Event Risk?
Minimizing the impact of event risk is one of the steps of the risk management strategies. Organizations can reduce the adverse economic impacts of event risks (such as fire outbreaks, theft, etc.) by insuring themselves. Further, various financial products, such as Act of God bonds, options, swaps, and collateralized debt obligations, are available, which can also help hedge the event risks. Investors use credit default swaps to protect themselves from the risk of credit default or use stop-limit orders to arrest potential losses during trading hours. However, certain event risks are beyond the purview of these financial indemnities, such as terrorist attacks, and no insurance companies offer any coverage against these devastating risks.
Event Risk Assessment
The process of assessment of event risk can be broken down into the following three steps:
- Identification of the potential hazards
- Determination of the probability of its occurrence
- Thorough evaluation of its severity
The assimilation of the above three steps helps in determining the probable consequences of an event if it occurs. Although it might seem simple, all the steps are complicated and require extensive practical knowledge and long computing hours. Hence, it is very important to have a team of professionals who are well-experienced in event risk management.
Event Risk Management
Event risk management is the outcome of the process of event risk assessment. All the required actions, measures, and protocols are decided here, such as eliminating, reducing, and mitigating the risks. Risk management may involve eliminating hazardous processes, implementing safer alternatives, containing or protecting them in designated areas, etc. Sometimes, the key individuals associated with the process are trained to circumvent the hazardous event. Many more event risk management strategies are available and can be employed case-to-case basis.
Conclusion
So, an event risk can cause economic or reputational damage to a company, an industry, or even the entire world. These event risks usually result in huge financial losses for businesses. However, the companies can reduce the adverse impact of some of these events by employing adequate and proper event risk management professionals.
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This is a guide to Event Risk. Here we also discuss the introduction and how to minimize event risk. Along with types and examples. You may also have a look at the following articles to learn more –
