4 things You Must Know About Risk Appetite

Effective Enterprise Risk Management calls for defining your risk appetite. This means not just quantifying your risk, but to take communicative approach. A thorough understanding of an organization's business model and its operations enables to define its risk appetite. The basic questions required to be focused upon while stating the risk appetite of an organization are in two context.

Ability of Risk taking

Willingness to take Risk

The ability to take risk depends upon financial position of the organization while the willingness to take risk is articulated by the C-suites of the organization. When the risk appetite framework is transparent and slated clearly, it enables a company to achieve more from its risk.

Initiating the Dialogue Through a Risk Appetite Statement:

The risk appetite of an organization is reflected when the management and the Board of directors take decisions for the organization. When a risk appetite statement of an organization is stated, it commences a continuous, strategic conversation between management and the board. The three key elements of risk appetite statement are:

• Acceptable risk appetite: An example of acceptable risk can be Market Growth.
• Undesirable risk: Risks that are off strategy risks can be Reputation and Brand Image or financial derivatives.
• Strategic, financial, and operating risks: Strategic parameters of risks are investment limits. On the other hand, financial risk parameters include target debt rating or financial strength. Operational parameters of risks are loss exposure, sustainable business model, and customer dependence.

The Effect of Risk Appetite on Management of the Organization:

The management of the company considers risk appetite when it states its objectives, formulates strategy, allocates resources and sets the risk tolerances. When pronounced precisely, the risk appetite gives an overall direction for risk management and becomes the base of the objective setting process. When a company faces a tough time to meet the target objectives, it displays its risk appetite.

Furthermore, lack of consistency and short term focus to the board and stakeholders is reflected by the drastic changes in parameters in the risk appetite.

Effectively Communicating Risk Appetite Using the Risk Appetite Statement:

Risk appetites are assimilated with strategy, budgets, and policies and often contain confidential

information. The communication of risk in between the management and board of directors should continue. Every employee of the organization should be familiar with the risk management issues. It is the senior management who conveys this risk appetite to its employees. Many companies tend to disclose their risk tolerant limit in the public disclosure.

Considering the present health of the company and current market scenario, a copy of Risk appetite should be presented to the Board every year to update it.

Maintaining the Risk Appetite Statement to Monitor Risk Profile Expectations:

Risk appetite statement can be used as an effective tool to boost corporate governance by provoking conversation between management and the board. The three steps to monitor risk profile can be:

• Research the historical and establish inherent risk appetite of the company.
• Review and revise the risk appetite statement.
• Finalize risk appetite statement and modify tolerances to assure they are consistent with risk appetite.

The risk appetite of an organization can be determined by following the management of the organization regardless of whether or not the organization has defined its risk appetite. A dynamic enterprise risk management approach is evident from an organization that facilitates the communication of risks and framework for the selection between strategic alternatives.

A well crafted risk appetite statement is expected to be:

Comprehensive: it should have the appropriate elaboration, pronouncing the coverage of risk landscape,

and depth, and it must address the key risks that otherwise limit the targets of the company.

Concrete and Practical: all financial risks should be identified and quantified with the aid of risk tolerances. For risks that are difficult to quantify, the company must define qualitative boundaries.

Consistent and Coherent: The risks implemented should be balanced by the risk tolerant boundaries. Risk appetite should link these measures to the business model.

A perfectly tailored risk appetite gives way to the fulfillment of ambitions of the organization. Moreover it serves as an essential tool to improve the organizational sequencing in terms of risk and performance. For more details on enterprise risk management visit us at CAREweb.