risk appetite framework. why define risk appetite & tolerance? ●helps align risk taking with...
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Risk Appetite Framework
Why Define Risk Appetite & Tolerance?
● Helps align risk taking with strategic objectives– Establishes direct link between strategy and front-line risks – Better allocation of resources
Ensures risk taking activities add value
● Helps guide decision makers at all levels of organization– Definition process aligns senior-level risk perceptions and
understanding– Agreed definitions provide boundaries for risk taking
● Promotes consistency in actions throughout organization– Encourages desired behaviors
● Helps prioritize mitigation actions for risks outside of tolerance
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Challenges● Lack of consensus on terms & methodology
– Risk appetite, tolerance, & capacity used interchangeably ● Many guidance documents focus on financial institutions● Initial framework below
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Risk Appetite Framework
Risk Appetite - Amount and type of risk company is prepared to pursue, retain or take; qualitative
Risk Tolerance - desired level of risk; quantitative
Risk Target - Risk owner’s optimal residual risk level, specific to each risk; quantitative
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Risk Appetite Framework
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Strategic Plan
Measures of
Success
Corporate
Objectives
ERM Risks
Risk Appetite
Risk Tolerance
Risk Target
Risk appetite statements
Risk Appetite – Rating Scale*
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Appetite
Philosophy Tolerance for Uncertainty
Choice Trade-off
Overall risk taking philosophy
Willingness to accept uncertain outcomes or period-to-period
variation
When faced with multiple options,
willingness to select option that puts measure at risk
Willingness to trade-off against
achievement of other measures
Open Will take justified risks
Fully expect and accept uncertainty
Will choose option with highest return; accept possibility of
failure
Willing
Flexible Will take strongly-justified risks
Expect some uncertainty
Will choose to put this objective at risk, but will manage impact
Willing under right conditions
Cautious Preference for safe delivery
Limited - Willing to accept a limited
amount of uncertainty
Will accept if limited & heavily outweighed by
benefits
Prefer to avoid
Minimalist Extremely conservative
Low – Willing to accept a low amount
of uncertainty
Will accept only if essential, and limited possibility/extent of
failure
With extreme reluctance
Averse “Sacred”- Avoidance of risk is
a core objective
Extremely Low – Willing to accept an
extremely low amount of uncertainty
Lowest risk option, always
Never
* Defining your taste for risk- Rob Quail, Corporate Risk Canada spring 2012
Risk Appetite - Calibration
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Safe, healthy rewarding workplace
Clean environment
Outstanding financial performance
Supportive communities 0
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Risk Appetite - Statements
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● Overall risk philosophy statement
● Risk appetite statements for each measure of success
VeryLikely
Quite Likely
Somewhat
Likely
Unlikely
Extremely
Unlikely
Insignificant Minor Moderate Major Catastrophic
Lik
elih
oo
d
Consequence
Tolerance
Measure of Success: XXYY
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Risk Tolerance
VeryLikely
Quite Likely
Somewhat
LikelyCurrent residual risk
Unlikely
Risk target
Extremely
Unlikely
Insignificant Minor Moderate Major Catastrophic
Lik
elih
oo
d
Consequence
Tolerance
Measure of Success: XXYY Risk ZZ-2014
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Risk Tolerance