Risk Alert Newsletter

Determination of Risk Appetite

Risk Appetite 2

Determination of Risk Appetite

Risk appetite in every organization is determined by the following, amongst other factors:

  1. Existing Risk Profile: The current level and distribution of risks across the entity and across the various risk categories.
  2. Risk Capacity: The amount of risk the entity is able to support in the pursuit of its objectives.
  3. Risk Tolerance: Acceptable level of variation the entity is willing to accept regarding the pursuit of its objectives.
  4. Risk Attitudes: Attitudes towards growth risk and return

Mark Carey suggested that the management should be able to answer the following questions in order to define the organization's risk appetite and determine the acceptable level of risk.

  • Where do we feel we should allocate our limited time & resources to minimize risk exposures and why?
  • What level of risk exposure requires immediate action and why?
  • What level of risk requires a formal response strategy to mitigate the potentially material impact and why?
  • What events have occurred in the past, & at what level were they managed and why?

The questions constitute a simple test that can assist any organization in managing the risks it may be exposed to. For instance, if a manager can sincerely answer why he feels a particular project, product, initiative or strategy should be allocated more time and resources (due to the inherent risk factors) as compared with others, this can ultimately help in giving appropriate definition to the organization’s risk appetite and determine the acceptable level of risk.

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The Director General / Chief Executive

 Association of Enterprise Risk Management Professionals

 Tel 07062206653, 08033468451, 07088905252

Email; info@aermp.org ; dg@aermp.org (www.aermp.org

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