What do 'likelihood' and 'severity' refer to in the context of risk assessment?

In risk assessment, 'likelihood' and 'severity' are critical concepts that help in evaluating potential risks and their implications. Likelihood specifically refers to the probability or chance of a loss happening. This involves assessing how often an event is expected to occur based on statistical data or historical trends. Severity, on the other hand, pertains to the potential impact or cost associated with that loss. This aspect considers how much damage or financial burden the loss could impose if it were to occur.

When assessing risks, it’s essential to understand both dimensions. Knowing the likelihood helps in predicting the occurrence of an event, while understanding severity allows for an evaluation of the consequences related to that event. This comprehensive view is crucial for effective risk management and helps in making informed decisions regarding insurance coverage, premium calculations, and overall risk strategy.