CRISC Certified in Risk and Information Systems ControlIT Risk AssessmentMedium
A telecommunications company is evaluating the risk of a major service outage due to a natural disaster. The risk management team estimates the likelihood of such an event occurring once every 10 years and the potential financial impact to be $5,000,000 per occurrence. The company's current insurance policy covers 60% of the financial impact for such events. What is the Annualized Loss Expectancy (ALE) for this risk AFTER considering the insurance coverage?
- A$200,000
- B$300,000
- C$2,000,000
- D$500,000
Show answer & explanationAnswer & explanation
Correct answer: A. $200,000
First, calculate the Annualized Rate of Occurrence (ARO) as 1/10 = 0.1. The Single Loss Expectancy (SLE) is $5,000,000. The ALE before insurance is ARO * SLE = 0.1 * $5,000,000 = $500,000. Since insurance covers 60%, the remaining loss is 100% - 60% = 40%. Therefore, the ALE after insurance is $500,000 * 0.40 = $200,000.
Why the other options are wrong
- B. This would be the ALE if the insurance covered 40% instead of 60%.
- C. This is the single loss expectancy after insurance, not the annualized loss expectancy.
- D. This is the ALE before considering the insurance coverage.
Annualized Loss Expectancy (ALE)
The expected monetary loss for an asset or a set of assets due to a risk over a one-year period.
- ALE = Single Loss Expectancy (SLE) × Annualized Rate of Occurrence (ARO).
- Used in quantitative risk analysis.
- Helps in justifying security investments.
Memory trick: Always Calculate Losses Expected Annually to make smart choices.