Risk exposure is a quantified loss potential of business. Risk exposure is usually calculated by multiplying the probability of an incident occurring by its potential losses.
When considering loss probability, businesses usually divide risk into two categories: pure risk and speculative risk. Pure risks are categories of risk that are beyond anyone's control, such as natural disasters or untimely death. Speculative risks can be taken on voluntarily. Types of speculative risk include financial investments or any activities that will result in either a profit or a loss for the business. Speculative risks carry an uncertain outcome. Potential losses incurred by speculative risks could stem from business liability issues, property loss, property damage, strained customer relations and increased overhead expenses.
To calculate risk exposure, variables are determined to calculate the probability of the risk occurring. These are then multiplied by the total potential loss of the risk. To determine the variables, organizations must know the total loss in dollars that might occur, as well as a percentage depicting the probability of the risk occurring. The objective of the risk exposure calculation is to determine the overall level of risk that the organization can tolerate for the given situation, based on the benefits and costs involved. The level of risk an organization is prepared to accept is called its risk appetite.