Risk Appetite Statements Revisited

Companies have some key tools available to them to control their own destiny. Strategic Planning and articulation of Risk Appetite are two powerful frameworks in this regard. The former is a well-developed process in most businesses, however the rapidly changing world (geopolitical, environmental, and world health) suggest the Risk Appetite Statement is worth a fundamental refresh.

In the aftermath of the financial crisis of 2007, the Financial Stability Board (FSB) launched a peer review on risk governance which resulted in five key recommendations. One of these concerned the Risk Appetite Framework and included the key elements of an effective Risk Appetite Statement.

The Risk Appetite Statement is defined by the FSB as

 “The articulation in written form of the aggregate level and types of risk that a financial institution is willing to accept, or to avoid, in order to achieve its business objectives”

While many organisations now have such a framework in place, it may be timely to refresh; to discuss, challenge, and find some unanimity.

Inputs to the debate will include:

1. Environmental and business constraints - available capital, regulatory permissions, internal resources (capacity and expertise) and constraints imposed by a parent company covering product set, market, types of investments etc.;
2. Agreement on key categories within which the Risk Appetite should be expressed; Market Risk, Insurance Risk, Conduct Risk, Operational Risk, Reputation Risk etc.;
3. Scenario analysis across each of the key risk categories; and
4. Stakeholders – shareholders, customers, employees, regulators etc

The output must be concise, easy to understand and above all measurable, either quantitatively or through some form of qualitative assessment. It is the measurable test that guarantees a valuable risk appetite statement and a usable management tool in the business.

The output must also be aligned to the strategy of the business, supporting short, medium and longer term strategic goals. It should act, not simply as a strategic constraint but, as a motivator to ensure risk capital is deployed in a sensible manner for stakeholder reward.

Even if a fundamental refresh does not yield significant change, the process will be worthwhile, bringing clarity of purpose and confirming the level of unanimity (or not) across the board and management.

Seamus@GovernanceMatters.ie

July 2020