Severity Thresholds
Although severity thresholds are typically described in dollars, they can also be described in operational impact terms. However, to calculate an ROI as described later in the Guidebook, dollar values are necessary to plug into the formula.
General suggestions on defining severity thresholds are:
- Negligible: A company may not adopt a philosophy of “negligible” environmental However, if used, this threshold must be defined in terms or values accepted by the risk management function.
- Low: This will be the lowest number in the company’s risk tolerance levels. This may reflect the company’s self-insured retention level or deductible that applies either to the company as a whole, a business unit or the topic (g., environmental).
- Medium: This is generally the threshold that is most difficult to establish because this is frequently in between more well-established reference Avoid the temptation of making this threshold overly wide/large. Doing so will skew the end result.
- High: This may be defined as an event that that results in a total business disruption or unplanned operating downtime for a certain time period (e., a week or month). It may also be a specific dollar amount linked to insurance coverage, limits and exclusions, or to the company’s ability to self-fund recovery from a major event.
- Catastrophic: This threshold may represent an existential business threat to the company, operating unit or an individual major It may also be set at the limits of current insurance coverage.
Where ranges are used in the thresholds, it will be necessary to convert those to a single numerical value for purposes of the ROI formula. The midpoint of the range is appropriate. For instance, if you establish a range of $10 million to $30 million for “high,” $20 million should be used in the following steps.