A well-articulated risk appetite not only supports effective risk taking, but drives strategy and improves long-term business performance. That is the key message of new guidance published by Airmic in partnership with Alvarez & Marsal (A&M). ‘Risk Appetite: A Short Guide’ advises risk professionals and senior executives on how to effectively set their organization's appetite for risk, covering the core components of a risk appetite framework and how such a framework can be used in supporting business objectives. The guidance also aims to dispel the many myths surrounding the subject, which have arisen from misunderstandings and conflicting interpretations.
"Many companies treat risk appetite setting as a tick-the-box compliance activity or they try to apply a one-size-fits-all templated approach," according to Tom Teixeira, managing director in A&M's insurance and risk advisory business and one of the authors of the report.
"This guide is therefore not about the ABC of a risk appetite statement," he added. "It's about how risk appetite can be meaningfully applied to drive effective decision making and improve performance by considering the business model, industry change drivers and internal risk culture."
The report argues that the setting and application of risk appetite should not be a one-off exercise, or subject to fixed reviews, but should reflect a fast-changing business environment that can quickly render risk appetite statements and risk tolerance levels obsolete.
"Risk appetite should be as much a cultural journey that supports agile yet risk-aware decision making and management action as it is about frameworks, limits, measures and systems," Mr Teixeira commented.
The close link between risk appetite, strategy and business performance makes this guide an important read for risk professionals, major decision makers and internal auditors, according to Airmic. It also has relevance to regulators and underwriters.
