What type of risk analysis is used to calculate an annual loss of expectancy?

Risk is related with vulnerabilities, which threaten confidentiality (C), integrity (I), and availability (A) of the assets. This is described as the CIA Triad.

1. Confidentiality is about not disclosing sensitive information to other people.
2. Integrity is about preserving the state of the system—we don’t want attackers to change our data.
3. We do want our systems to be up and running. Hence availability is considered.

Quantitative Analysis

Quantitative analysis is about assigning monetary values to risk components. Let’s analyze the example of hard drive failure to better understand how it works.
Let’s first describe the threat, vulnerability, and risk.

1. Threat—hard drive failure
2. Vulnerability—backups done rarely
3. Risk—loss of data

The asset is data. The value of the asset (AV) is assessed first—$100,000, for example.
Let’s discuss the single loss expectancy (SLE). It contains information about the potential loss when a threat occurs (expressed in monetary values). It is calculated as follows: SLE = AV x EF, where EF is exposure factor. Exposure factor describes the loss that will happen to the asset as a result of the threat (expressed as percentage value). SLE is $30,000 in our example, when EF is estimated to be 0.3.
Let’s continue this case. Annualized rate of occurrence (ARO) is described as an estimated frequency of the threat occurring in one year. ARO is used to calculate ALE (annualized loss expectancy). ALE is calculated as follows: ALE = SLE x ARO. ALE is $15,000 ($30,000 x 0.5), when ARO is estimated to be 0.5 (once in two years). As we can see, the risk is about the impact of the vulnerability on the business and the probability of the vulnerability to be exploited.

Cost/Benefit Analysis

Let’s continue the example from the previous section. Annualized loss expectancy (ALE) is $15,000. This means that the potential loss is $15,000 in one year, when the data is lost as a result of the hard drive failure. A countermeasure can be used to reduce the potential loss. It happens when the management decides to reduce the risk. This countermeasure should not cost more than $15,000 per year. Otherwise it wouldn’t be logical from a business point of view (we don’t want to spend more money than we can potentially lose). This is basically how cost/benefit analysis works.
Let’s see how the annual value of the countermeasure to the company (COUNTERMEASURE_VALUE) can be calculated:
COUNTERMEASURE_VALUE = ALE_PREVIOUS – ALE_NOW – COUNTERMEASURE_COST, where
ALE_PREVIOUS: ALE before implementing the countermeasure
ALE_NOW: ALE after implementing the countermeasure
COUTERMEASURE_COST: annualized cost of countermeasure (please note that it’s not only purchasing cost—maintenance cost is included).

Risk Handling

Risk can be handled in the following ways:

1. Risk reduction—risk is reduced to an acceptable level (countermeasures implemented; types of countermeasures are described in the next section).
2. Risk avoidance—stopping the activity, which leads to the risk
3. Risk transference—the risk is transferred to the insurance company
4. Risk acceptance—accepting the cost of potential loss (no countermeasures)

Countermeasures

Let’s discuss the types of countermeasures (also called controls) that are implemented in the case of risk reduction. There are three types of countermeasures:

1. Administrative (e.g., security awareness training should not be forgotten, because people are the weakest point in the security chain)
2. Technical (e.g., firewall)
3. Physical (e.g., locks)
   

Countermeasures are implemented to reduce the risk. We talk about total risk when no countermeasure is implemented. Let’s assume now that the countermeasure is implemented. Perfect security doesn’t exist and there is some risk left. This is a residual risk.

An important feature of the Annualized Loss Expectancy is that it can be used directly in a cost-benefit analysis. If a threat or risk has an ALE of $5,000, then it may not be worth spending $10,000 per year on a security measure which will eliminate it.

One thing to remember when using the ALE value is that, when the Annualized Rate of Occurrance is of the order of one loss per year, there can be considerable variance in the actual loss. For example, suppose the ARO is 0.5 and the SLE is $10,000. The Annualized Loss Expectancy is then $5,000, a figure we may be comfortable with. Using the Poisson Distribution we can calculate the probability of a specific number of losses occurring in a given year:

We can see from this table that the probability of a loss of $20,000 is 0.0758, and that the probability of losses being $30,000 or more is approximately 0.0144. Depending upon our tolerance to risk and our organization's ability to withstand higher value losses, we may consider that a security measure which costs $10,000 per year to implement is worthwhile, even though it is more than the expected losses due to the threat.

Which type of risk analysis computes an annual loss expectancy?

What are the factors we use to calculate annual loss expectancy?

What are the 3 types of analyzing risk?

Which method is used for risk analysis?