Risk appetite statement
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A risk appetite statement is a formal declaration by a company's management of the amount of risk that they are willing to accept and can be seen as the level of risk at which the company is comfortable to operate. It is a strategic decision which sets out the amount of risk that the company is willing to accept in order to achieve its objectives and provides guidance on how to make decisions when considering new opportunities and investments. It also provides a framework for evaluating the potential returns and risks associated with business decisions. It is based on the company's values and risk management strategy.
Example of risk appetite statement
- Our company is committed to pursuing our business objectives within a controlled risk environment. We have a risk appetite that focuses on balancing the potential return of an investment with the associated risks. We will only accept investments that provide a reasonable balance between the potential returns and risks involved.
- We will only accept investments where the expected return is greater than the risk-adjusted return. We will consider the impact of the investment on our overall risk profile and will ensure that we diversify our investments across different asset classes and geographies.
- We will only accept investments that do not exceed our stated risk tolerance or exceed the maximum level of risk we are comfortable with. We understand that investments may involve risks and we will only accept investments that we have assessed and understood the associated risks.
- We will not accept investments that are contrary to our values and ethical standards, or that involve activities that are deemed unacceptable. We will take a proactive approach to risk management and compliance and will provide our employees with the necessary tools, training and resources to ensure that all investments comply with our risk appetite.
When to use risk appetite statement
A risk appetite statement can be used in a variety of ways, including:
- Establishing a company’s overall risk strategy and setting boundaries for risk-taking activities.
- Forming the basis for the evaluation of potential investments, products, and services.
- Providing guidance and direction to managers and staff when making decisions.
- Assisting with the development of risk management policies and procedures.
- Helping to identify and assess areas of risk within the organization.
- Improving communication between senior management and staff.
- Facilitating the integration of risk management into the organization’s decision-making process.
- Enhancing the overall culture of risk management within the organization.
Types of risk appetite statement
- Qualitative Risk Appetite Statement: Qualitative risk appetite statements measure risk in terms of the organisation’s attitude and willingness to accept risk. This type of risk appetite statement outlines the company's desired risk profile and defines the risk parameters that management is willing to accept.
- Quantitative Risk Appetite Statement: Quantitative risk appetite statements measure risk in terms of numerical values or thresholds. This type of risk appetite statement outlines the company's desired risk profile and defines the quantitative risk limits that management is willing to accept. It can be used to ensure that risks taken by the organisation are within acceptable limits.
- Strategic Risk Appetite Statement: Strategic risk appetite statements measure risk in terms of the organisation’s desired strategy. This type of risk appetite statement outlines the company's strategic objectives and desired risk profile, and defines the risk parameters that management is willing to accept. It is used to ensure that strategies are aligned with the organisation’s risk appetite.
- Operational Risk Appetite Statement: Operational risk appetite statements measure risk in terms of operational processes and procedures. This type of risk appetite statement outlines the company's operational objectives and desired risk profile, and defines the risk parameters that management is willing to accept. It is used to ensure that operational processes and procedures are in line with the organisation’s risk appetite.
- Reputational Risk Appetite Statement: Reputational risk appetite statements measure risk in terms of the organisation’s reputation. This type of risk appetite statement outlines the company's desired risk profile and defines the risk parameters that management is willing to accept when it comes to their reputation. It is used to ensure that the organisation’s reputation is managed in line with their risk appetite.
Limitations of risk appetite statement
A risk appetite statement is an important part of a company's risk management strategy, but it has some limitations that should be considered when developing and implementing such a statement. These limitations include:
- It is difficult to accurately assess and quantify the amount of risk that a company is willing to take. Even with the best intentions, it can be difficult to accurately measure the risk that a company is willing to take and this can lead to decisions being made that are not in line with the company's risk appetite.
- It can be difficult to keep the risk appetite statement up to date. As the company's environment and objectives change, the risk appetite statement should be updated to reflect the changing risk environment. This can be a challenging and time consuming process.
- It can be difficult to ensure that the risk appetite statement is followed. Even with a clear risk appetite statement in place, it can be difficult to ensure that the statement is followed in practice.
- It can be difficult to be consistent in the application of the risk appetite statement. Different departments or individuals may have different interpretations of the risk appetite statement, leading to inconsistent decisions.
- It can be difficult to measure the effectiveness of the risk appetite statement. Without an effective way to measure the effectiveness of the risk appetite statement, it can be difficult to assess whether the statement is having the desired effect.
In addition to a risk appetite statement, there are other approaches related to risk management. These include:
- Risk Tolerance Statement: This is a statement that outlines the level of risk that an organization is willing to take on, in pursuit of its goals and objectives. This statement helps to set the boundaries for acceptable risk taking, and it should be regularly reviewed and updated as the organization’s risk profile changes.
- Risk Management Strategy: This is a formal document that outlines the approach taken by an organization to manage risk. It should include the organization’s risk appetite statement, as well as the processes and practices used by the organization to identify, assess, monitor, and manage risks.
- Risk Monitoring and Reporting: This is the process of regularly monitoring the organization’s risk profile and reporting the results to senior management. This helps to ensure that the organization’s risk appetite statement is being adhered to, and that any changes in the risk profile are identified and addressed.
- Risk Mitigation: This is the process of reducing or eliminating the potential impact of a risk. This could involve implementing controls, transferring the risk to another party, or taking other appropriate measures to reduce the likelihood of the risk occurring.
In summary, an effective risk management strategy includes a risk appetite statement, risk tolerance statement, risk management strategy, risk monitoring and reporting, and risk mitigation. These approaches help organizations to identify, assess, and manage risks, while also ensuring that they are operating within the bounds of their risk appetite.
Suggested literature
- Board, F. S. (2013). Principles for an effective risk appetite framework. Consultative Document, July.
- BOGHDADI, N. (2015). Risk Appetite Statement.
- Rittenberg, L., Martens, F., & Committee of Sponsoring Organizations of the Treadway Commission. (2012). Enterprise risk management: understanding and communicating risk appetite.
