What Is AI Risk?

AI risk can be thought of as the probability of an AI/ML model error, paired with the error's potential consequences. Speaking of potential: While these models have the capability to help shape the future of your organization, they also pose significant ethical, security, operational, and reputational challenges that need to be meticulously managed to prevent harm.

Across the globe, both regulatory bodies and private practices are implementing frameworks to ensure the responsible development, deployment, and governance of AI technologies. In doing so, organizations are increasingly fostering environments where innovation is balanced with accountability—ensuring that AI systems are transparent while concurrently mitigating risk.

Read on as we look further into AI risk management, its benefits, implementation strategies, and frequently asked questions.
 

What is AI risk management?

While AI risk refers to the potential negative outcomes associated with AI systems, AI risk management is the process of identifying, assessing, and mitigating these risks. AI risk management encompasses the various tools and strategies an organization adopts to address the specific challenges of AI.

Beyond its moral implications, failing to implement AI risk management practices can materialize in penalties: The US Federal Trade Commission (FTC) has indicated that it will actively enforce existing laws against unfair or deceptive practices that may arise from the use of AI systems. Similarly, the European Union proposed regulations that impose strict compliance requirements on AI development and usage, categorizing AI systems by risk and mandating rigorous assessments and transparency for high-risk applications.

That’s to say that AI risk management has progressed beyond a best-practice approach to a regulatory and legal necessity, compelling organizations to not only consider the ethical and societal implications of their AI deployments but also to adhere to emerging laws. Moreover, in adhering to these standards, organizations stand to avoid significant fines, legal challenges, and reputational damage.

From a macro standpoint, effective AI risk management strategies encompass several fundamental components:  

• The establishment of cross-functional teams that integrate legal, ethical, and technical expertise from the project's inception 
• The development of an informed risk-prioritization plan to address specific vulnerabilities 
• The implementation of continuously updated measures to respond to evolving AI capabilities and regulatory landscapes 

From a micro standpoint, effective AI involves a standardized approach across various categories: transparency, fairness, security, privacy, third-party risk, and safety. We’ll expand on each of these further.
 

The benefits of AI risk management 

AI risk management works to mitigate operational, ethical, reputational, and security vulnerabilities.

• Operational inefficiencies. AI risk management identifies and addresses potential failures in AI systems, improving reliability and performance, thereby ensuring that AI operations align with business objectives and maintain continuity in critical processes.
• Ethical violations. AI risk management aids on the ethical front by facilitating fairness, reducing bias, and ensuring that AI systems operate within ethical boundaries and societal standards. This not only helps in building trust among users and stakeholders but also aids in complying with associated regulations.
• Trust breaches. Unregulated AI models risk damaging an organization's reputation through controversial outcomes, breaches of privacy, or similar incidences. Effective AI risk management prevents such incidents, preserving public trust and confidence in the organization more generally.
• Security failures. AI risk management enhances organizational security by protecting systems against vulnerabilities, unauthorized access, and malicious attacks, thereby safeguarding sensitive information and critical infrastructure. Moreover, ongoing AI risk management ensures that AI systems are resilient to evolving cyber threats, safeguarding sensitive information and maintaining the integrity of AI operations.

Despite its advantages, just 21% of survey participants report that their organizations have implemented policies to govern employee use of generative AI technologies. This indicates a shortfall in the adoption of risk management practices, particularly when accounting for the risk of inaccuracy—a concern cited more often than cybersecurity and regulatory compliance issues. In the same vein, only three in 10 respondents indicate that their organizations are taking steps to address inaccuracies, highlighting an area of vulnerability.

These numbers can, in part, be attributed to AI’s novelty. As AI models become increasingly integrated into the workplace, organizations’ adoption of AI risk management strategies will most likely also become commonplace. In doing so, they’ll better position themselves to identify risk in a standardized, comprehensive manner, ultimately safeguarding their operations, reputation, and stakeholder interests.
 

Implementing AI risk management

AI risk management can be subcategorized into six areas: transparency, fairness, security, privacy, third-party risk, and safety.

• Transparency pertains to the clarity with which AI systems and their decision-making processes are communicated, whether to stakeholders, consumers, or staff. Transparency means offering insight into how an AI model derives its results and how such results may developmentally come about—including the data used, the algorithms applied, and the training methodologies employed.  
• Fairness relates to efforts to eliminate bias in AI systems, ensuring that these technologies operate impartially and do not perpetuate undesired results. Achieving fairness involves auditing data and associated processes for biases paired with continuously monitoring and testing AI systems for discriminatory outcomes.  
• Security encompasses the measures taken to protect AI systems from both well-known and evolving risks. Inherent in many models are vulnerabilities that, if not adequately addressed, can lead to significant breaches of privacy, integrity, and availability. These vulnerabilities may range from exploitation of model behavior—such as adversarial attacks that “deceive” AI into making incorrect decisions—to direct attacks on the data infrastructure itself. 
• Privacy involves ensuring that personal—and sensitive information, especially—is handled in compliance with data protection regulations and predetermined ethical standards. Organizations have a responsibility to safeguard the privacy of user data by implementing records protection measures, obtaining informed consent for data holding and use, and being transparent about data practices. Moreover, such responsibilities encompass adhering to data minimization and ensuring accountability through regular privacy audits and assessments. In doing so, effective privacy management helps to deter legal penalties and build trust with users. 
• Third-party risk management addresses the vulnerabilities that can arise from relying on external vendors and partners for data, algorithms, or infrastructure. Risk management in this area involves conducting due diligence on third parties, establishing clear contracts that specify compliance with security and privacy standards, and regularly auditing third-party services.  
• Lastly, safety ensures that AI systems do not pose a risk to our health or well-being. This is particularly critical in applications such as autonomous vehicles, medical devices, and industrial automation. Specific safety measures differ by industry and model but generally include rigorous testing, compliance with predetermined safety standards, and the implementation of fail-safes to mitigate the impact of system failures, among other measures.

In sum, implementing AI risk management requires an approach that concurrently addresses these six areas. Organizations can start by conducting a risk assessment to identify specific vulnerabilities within their AI systems and processes. Following this, they should develop a tailored risk management plan that incorporates best practices and regulatory requirements relevant to their industry and operational context. Moreover, as AI technologies and regulatory landscapes evolve, organizations must be prepared to update their risk management strategies accordingly.

By systematically implementing AI risk management practices across these six areas, organizations can navigate the complexities of AI deployment, ensuring that their use of AI technologies is responsible, ethical, and compliant with regulatory standards. This not only mitigates risk but also positions organizations to fully realize the benefits of AI, driving innovation and competitive advantage in an increasingly AI-prominent landscape.
 

AI risk management FAQs 

How can I prioritize AI risks?

AI risk management can be prioritized through a structured risk assessment process, focusing on identifying the most significant risks based on their likelihood and potential impact. Such assessments should involve all relevant stakeholders, from technical teams to legal and ethical advisors, to ensure a comprehensive understanding of potential risks.
 

Where should my organization start with AI risk?  

AI risk management begins with the process of identifying the range of risks that AI systems may pose to your organization. Addressing these risks—and in doing so, prioritizing their mitigation—involves evaluating both the likelihood of each risk occurring and the potential impact it could have. Establishing a standardized AI risk management plan includes accounting for six key categories: transparency, fairness, security, privacy, third-party risk, and safety.

AI risk management is preemptive in nature—the sooner your organization can prioritize addressing these risks, the sooner you can safeguard against potential negative outcomes.