Risk appetite
Encyclopedia
Risk Appetite is a method to help guide an organisation’s approach to risk
and risk management
.
Below are examples of broad approaches to setting risk appetite that a business may adopt to ensure a response to risk that is proportionate given their business objectives.
Averse Avoidance of risk and uncertainty is a key organisation objective.
Minimal Preference for ultra-safe options that are low risk and only have a potential for limited reward.
Cautious Preference for safe options that have a low degree of risk and may only have limited potential for reward.
Open Willing to consider all potential options and choose the one most likely to result in successful delivery, while also providing an acceptable level of reward and value for money.
Hungry Eager to be innovative and to choose options offering potentially higher business rewards, despite greater inherent risk.
The appropriate approach may vary across an organisation, with different parts of the business adopting an appetite that reflects their specific role, with an overarching risk appetite framework to ensure consistency.
However, often measures can be developed for different categories of risk. For example, it may aid a project to know what level of delay or financial loss it is permitted to bear. Where an organization has standard measures to define the impact and likelihood of risks, this can be used to define the maximum level of risk tolerable before action should be taken to lower it.
A defined acceptable levels of risk also means that resources are not spent on further reducing risks that are already at an acceptable level.
Risk
Risk is the potential that a chosen action or activity will lead to a loss . The notion implies that a choice having an influence on the outcome exists . Potential losses themselves may also be called "risks"...
and risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
.
Definition
The level of risk that an organisation is prepared to accept, before action is deemed necessary to reduce it. It represents a balance between the potential benefits of innovation and the threats that change inevitably brings.Levels of risk appetite
The appropriate level will depend on the nature of the work undertaken and the objectives pursued. For example, where public safety is critical (e.g. operating a nuclear power station) appetite will tend to be low, while for an innovative project (e.g. early development on an innovative computer program) it may be very high, with the acceptance of short term failure that could pave the way to longer term success.Below are examples of broad approaches to setting risk appetite that a business may adopt to ensure a response to risk that is proportionate given their business objectives.
Averse Avoidance of risk and uncertainty is a key organisation objective.
Minimal Preference for ultra-safe options that are low risk and only have a potential for limited reward.
Cautious Preference for safe options that have a low degree of risk and may only have limited potential for reward.
Open Willing to consider all potential options and choose the one most likely to result in successful delivery, while also providing an acceptable level of reward and value for money.
Hungry Eager to be innovative and to choose options offering potentially higher business rewards, despite greater inherent risk.
The appropriate approach may vary across an organisation, with different parts of the business adopting an appetite that reflects their specific role, with an overarching risk appetite framework to ensure consistency.
Measuring risk appetite
Precise measurement is not always possible and risk appetite will sometimes be defined by a broad statement of approach. An organisation may have an appetite for some types of risk and be averse to others, depending on the context and the potential losses or gains.However, often measures can be developed for different categories of risk. For example, it may aid a project to know what level of delay or financial loss it is permitted to bear. Where an organization has standard measures to define the impact and likelihood of risks, this can be used to define the maximum level of risk tolerable before action should be taken to lower it.
Purpose and benefits
By defining its risk appetite, an organisation can arrive at an appropriate balance between uncontrolled innovation and excessive caution. It can guide people on the level of risk permitted and encourage consistency of approach across an organisation.A defined acceptable levels of risk also means that resources are not spent on further reducing risks that are already at an acceptable level.