A discussion of Risk Appetite by thought leaders
Last month, I was privileged to speak at the Institute of Risk Management (IRM) in London. This is an interesting organization, focused on enterprise risk management. Their web site is www.theirm.org.
While there, I picked up a copy of their excellent magazine: Risk Management Professional – www.rmprofessional.com.
A couple of articles in their Risk Appetite column, from the March and September issues, caught my eye.
In the March issue, Philip Martin (page 22 at this link) started the discussion. He is chairman of the Institute of Operational Research (IOR) and clearly a respected thought leader on this topic.
I have always stressed that a risk appetite statement has no value unless you can measure actual risk levels against it, which lets you take action to manage the level of risk you take. Philip provides two examples of how this can be articulated.
- “We will invest a percentage of our funds in a particular asset and sell it when the price reaches X or drops to Y: our portfolio will be made up of A% equities, B% bonds and C% cash across certain sectors”
- “We will lend specific amounts to particular sectors and in certain geographic territories”
Philip closes his short article with a reference to an IOR paper – available at http://www.ior-institute.org.
In the September issue, Richard Archer picks up the discussion. I like his explanation of the difference between risk appetite and risk tolerance (the first is the level of risk you pursue to make profit, the second is how much you can tolerate before financial or other distress), as well as the discussion of practical challenges when setting risk appetite/tolerance levels.
Questions for you:
- Has your organization set risk appetite or tolerance limits?
- Are actual levels measured and compared to the limits?
- Are they communicated to all who need to act on them?
- Can you share your successes, recommendations, etc?