What are critical risks in the context of risk management?

In the realm of risk management, critical risks are defined as those potential losses or threats that can significantly impact an organization's viability, potentially leading to dire consequences, such as bankruptcy. Given this context, focusing on losses that could bankrupt the firm encapsulates the essence of critical risks. These are the types of risks that, if not addressed properly, may lead to severe financial distress or even the cessation of business operations.

Understanding critical risks helps organizations prioritize their risk management efforts. By identifying and managing these high-stakes risks, firms can develop strategies to mitigate their impact and safeguard their financial stability. This differs from lower-level risks, which may involve minor operational hazards or low-impact financial risks, as these do not present an immediate or severe threat to the overall health of the organization. Additionally, unmanaged risks with negligible effects do not require the same level of attention or resources, as their potential consequences are minor and manageable.