Airmic has published a new guide in its series of popular EXPLAINED guides. ‘Risk Appetite: The facts, the myths, and the links with culture, maturity and sustainability’ aims to provide guidance for learning and development at an introductory level.
Risk appetite is a key component of enterprise risk management – it refers to the amount and type of risk that an organization is willing to pursue or retain.
Willingness to bear risk can be defined in two ways:
- An organization’s desire or aversion to pursue opportunities in an uncertain business environment
- How much volatility around an expected outcome is tolerable in terms of capacity, regulatory compliance, ethics, reputation and alternative costs for the business.
The guide aims to provide individuals who may not be risk management specialists, with a high-level overview of:
- What risk appetite is and why it is important
- How risk appetite can be used to support decision-making
- The role of culture in risk management
- Practical challenges of applying the concepts of risk appetite.
The approach described in the guide is aimed at ensuring that an organization effectively implements a mechanism for understanding how much risk it should take in relation to strategic objective-setting, value creation and best value delivery, business model changes and investment decisions.
Defining and implementing risk appetite (increasingly referred to as a risk attitude) is a strategic activity that involves the Board and top management, as it must be aligned with strategic objectives, and requires consensus and engagement from the organisation’s leadership.
Risk appetite varies between industry sectors and between organizations within those sectors, and by geographies and types of risk.
The publication is a partnership between Airmic and Arthur D Little, a management consultancy, and QBE, an international insurance company.
Read the guide (PDF).