Executive Summary - The Institute of Risk Management

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Five tests for risk appetiteframeworksIn summary, there are five tests thatDirectors should apply in reviewing theirorganisation’s risk appetite framework:1 Do the managers making decisionsunderstand the degree to which they(individually) are permitted to exposethe organisation to the consequencesof an event or situation? Any riskappetite framework needs to bepractical, guiding managers to makerisk-intelligent decisions.2 Do the executives understand theiraggregated and interlinked level ofrisk so they can determine whetherit is acceptable or not?3 Do the board and executive leadershipunderstand the aggregated andinterlinked level of risk for theorganisation as a whole?4 Are both managers and executives clearthat risk appetite is not constant? It maychange as the environment and businessconditions change. Anything approvedby the board must have some flexibilitybuilt in.5 Are risk decisions made with fullconsideration of reward? The riskappetite framework needs to helpmanagers and executives take anappropriate level of risk for thebusiness, given the potential for reward.We believe that by following the guidanceset out in detail in our document, directorswill be able to be confident that they canpass all of those five tests.“The risk appetite statement isgenerally considered the hardestpart of any Enterprise RiskManagement implementation.However, without clearly defined,measurable tolerances the wholerisk cycle and any risk frameworkis arguably at a halt.”Jill Douglas, Head of Risk,Charterhouse Risk Management14
Questions forthe boardroomBelow we set out some questions thatwe think boards may want to consider,as part of an iterative process over time,as they develop their approaches to riskappetite and which will enable them toremain at the forefront of the discussion.One clear outcome from our consultationexercise was that, despite the expectedvariation in views on the technical aspectsof risk appetite, there was a commonacceptance of these questions as a usefulstarting point for board discussion.Background1 What are the significant risks theboard is willing to take? What are thesignificant risks the board is not willingto take?2 What are the strategic objectives ofthe organisation? Are they clear?What is explicit and what is implicitin those objectives?3 Is the board clear about the natureand extent of the significant risks it iswilling to take in achieving its strategicobjectives?4 Does the board need to establish clearergovernance over the risk appetite andtolerance of the organisation?5 What steps has the board taken toensure oversight over the managementof the risks?15
Page 1 and 2: AppetiteRisk & ToleranceExecutive S
Page 3 and 4: ForewordRisk appetite today is a co
Page 5 and 6: All successful organisations need t
Page 7 and 8: We do not regard this guidanceas th
Page 9 and 10: Risk appetite -principles and appro
Page 11 and 12: Risk and controlWe think that this
Page 13 and 14: We believe that the appetite will b
Page 15: Flexibility - all of this needs to
Page 19 and 20: Governing a risk appetite20 Is the

Executive Summary - The Institute of Risk Management

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