The Risk Appetite Statement
The risk appetite statement is both a physical document and a process. The main goal is to write down your business’s disposition toward risk relative to return.
The risk appetite statement has three goals:
◆ To set the risk tolerance for the company (appetite and measures)
◆ To provide the basis for a risk limit structure consistent with this tolerance and strategy
◆ To provide management guidance for annual business and the strategic planning process
Risk Factors
The risk appetite is the key mechanism for setting the tone from the top. It embodies all of the key directions that the organization requires at a high level and provides the key pieces of information required to manage risk. Risk management teams use thresholds and the confidence interval established by the risk appetite to measure and set limits and other mitigation devices. Also, the risk versus return expectations inform line managers about the type of balance required on their parts.
Once you have determined your risk parameters, elaborate on the ways you see risk playing out. Use the preceding goals to help communicate your willingness and ability to take risk to the organization, board, investors, and any relevant external groups. Answer these questions:
How would you describe your relative willingness to take risk?
What is the total amount of risk that you can stand?
How does that risk break down among your departments and specific risk classes?
What are your perceived limits?
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