Developing a Robust Risk Appetite Statement
In a recent Own Risk and Solvency Assessment webinar conducted by FTI Consulting, more than 50 percent of attendees stated they had not adequately defined risk appetite as part of their ORSA implementation plans. Since understanding risk appetite is the key to implementing a risk management program aligning business activities with strategic goals, this figure is surprising.
What is a risk appetite statement?
A risk appetite statement documents the types and amounts of risk an organization is willing to accept in order to achieve its business objectives. An organization’s strategic goals should be the driver of its risk philosophy, which is defined through a disciplined process that involves setting risk preferences, articulating specific risk tolerances (e.g. high, medium and low), then establishing risk guidelines, rules, policies and controls. The strategic goals are linked with the company’s primary corporate financial objectives, for example to achieve an underwriting profit of a certain level, preserving capital adequacy, maintaining liquidity or protecting franchise value.
Accordingly, without a risk appetite statement, there is insufficient basis for managing risk. Developing a risk appetite statement, although straightforward in concept, requires significant knowledge of the business and specific expertise in the disciplines of risk management. In this article, we provide practical guidance for understanding how to develop and apply an effective risk appetite statement.