Rainbow Risk

April 1, 2010

One of the benefits of quantifying risk for an information risk issue or finding is that it gives us an additional dimension for aggregate risk analysis. Instead of just simple counts of issues categorized by ISO 27002 section – we can now analyze risk (dollar values) in numerous contexts; limited primarily by the data you are collecting and your ability to associate some data elements to various frameworks. (ISO 27002, BASEL II, COBIT IT Processes, etc…).

Loss simulation and aggregate risk analysis is a big part of my world right now. However, one of the most complex challenges I face is visually representing risk in a meaningful manner to management. So, over the next few posts, I want to share some visualizations of risk and how they could possibly be used for decision making.

The chart above is often referred to as a “rainbow chart”. Technically speaking though, it is a 100% Stacked Bar Chart. What this chart is depicting is the breakdown of risk (percentage of loss and ISO 27002 section) of a simulated aggregate loss distribution; by loss distribution percentile. Say what…?

Let’s break it down…

Warning – I am going to oversimplify some statistical concepts. And yes – all of the percentages and dollar values are from a dataset with fictitious data for the purposes of illustration.

Output from simulations are often analyzed by percentiles. We often zero in on the 50th percentile; sometimes an indicator of the mean or expected loss for a defined time frame. For illustration purposes let’s associate some dollar values to loss distribution percentiles:

5th percentile: $100K
50th percentile: $1M
80th percentile: $2M
99th percentile: $5M

Given the dollar values above as well as the chart we can infer the following:

5th percentile:
a.    5% of the iterations resulted in simulated loss of around $100K.
b.    Roughly 30% of the simulated loss at the 5th percentile is related to Compliance issues (~33%; $33K).
c.    Another 30% of the simulated loss at the 5th percentile is related to Access Control issues (~30%; $30K).
d.    About 20% of the simulated loss at the 5th percentile is related to Systems Development & Maintenance issues (~20%; $20K).
e.    About 8% of the simulated loss at the 5th percentile is related to Business Continuity Mgmt issues (~8%; $8K).

50th percentile:
a.    50% of the iterations resulted in simulated loss of around $1M.
b.    Roughly 28% of the simulated loss at the 50th percentile is related to Compliance issues (~28%; $280K).
c.    Another 30% of the simulated loss at the 50th percentile is related to Access Control issues (~30%; $300K).
d.    About 22% of the simulated loss at the 50th percentile is related to Systems Development & Maintenance issues (~22%; $220K).
e.    About 12% of the simulated loss at the 50th percentile is related to Business Continuity Mgmt issues (~12%; $120K).

99th percentile:
a.    1% of the iterations resulted in simulated loss of around $5M (100% -99% = 1%).
b.    Roughly 12% of the simulated loss at the 99th percentile is related to Compliance issues (~12%; $600K).
c.    Another 15% of the simulated loss at the 99th percentile is related to Access Control issues (~15%; $750K).
d.    About 12% of the simulated loss at the 99th percentile is related to Systems Development & Maintenance issues (~12%; $600K).
e.    About 55% of the simulated loss at the 99th percentile is related to Business Continuity Mgmt issues (~55%; $2.75M).

PRACTICAL APPLICATION

This type of risk visualization allows for the following:

1.    BETTER VISIBILITY. Gives us visibility to risk by loss severity and by ISO 27002 sections.
2.    INFORMED DECISIONS. Allows for tactical and strategic decision making.
a.    Tactical. Risk around the 50th percentile is loss we would expect 50% of the time; time being annually. Thus, we can actively manage (reduce or maintain) expected annual loss by targeting categories of risk at this or surrounding percentiles.
b.    Strategic. Risk around the 80th (1-in-5) or 90th (1-in-10) percentiles is greater in severity but less likely to occur. However when you think of this in terms of years and given the volatility of threats in our profession – we have to be mindful of low frequency / high magnitude loss events. Thus, to address the risk at these percentiles – we could be more strategic in our planning and investments. It could take a few years to mitigate the risk down to an acceptable level – but we can spread those mitigation costs over time.
3.    COST / BENEFIT ANALYSIS. Above I listed risk at the 80th percentile to be about $2M dollars. We can quickly see that 30% of the risk at the 80th percentile is related to Access Control (~30%, $600K). If I want to reduce the access control related risk at this percentile and I estimate it’s going to cost me $100K – I can demonstrate a risk reduction both mathematically and by re-running my simulations absent issues that would be mitigated by my investment.
4.    DRILL DOWN. Depending on how your issues are tagged, we could drill down into ISO 27002 sections to see which sub-sections are driving the most risk for its parent section.

FINAL THOUGHT. There is uncertainty with risk. Performing aggregate analysis and simulations on your entire risk repository highlights the variability of loss and can make it easier to explain uncertainty to others outside the information security profession. Take for example the “compliance risk” values above. Annual expected loss associated with Compliance-related issues could be as little as $33K, most likely $280K and possibly $600K or worse. Do not underestimate management’s ability to understand this uncertainty and their appetite to make effective decisions around it.