What is Residual Risk?

Residual risk is the remaining amount of loss exposure to which a business is subjected after all other risks have been eliminated or offset through the application of risk management techniques. The organization owns this residual risk, since it cannot shift it elsewhere, mitigate it through process changes, or offload it with insurance purchases. Some residual risk only arises through unforeseen circumstances, and so a firm's managers do not know that it exists.

How to Manage Residual Risk

There are several ways to manage residual risk. For example, an organization might choose to remain in a certain line of business despite the presence of substantial residual risk, because the profits to be generated are so high. However, a situation in which there are low profits or none at all to offset residual risk presents an argument that the organization should exit that line of business, since it will eventually suffer losses from the residual risk, resulting in net long-term losses.