Only you know the level of risk that sits comfortably for you and your business. Your risk appetite level is personalized and can differ from one business to the next – from one person to the next. Even within your own organization, your appetite level can vary according to the type of risk you are exposed to.
What is a risk appetite?
Your risk appetite is the level of risk you are willing to accept or tolerate in pursuit of your business objectives.
Every business has risks – some can be managed, some can be avoided, and some cannot be tolerated. Your risk approach to managing these risk is dictated by your comfort level.
If you articulate your risk appetite accurately, you can limit misunderstandings when communicating your expectations to those designated to or interested in how you manage your risks.
How do I express my risk appetite level?
Formally express your appetite level for a type of risk through the use of a risk appetite statement. The statement should connote:
(1) the level you are willing to accept or tolerate to meet your business objectives,
(2) what that means for the internal controls you will put in place to achieve this level, and
(3) the responsive action you will take if the actual level of risk falls outside that level.
There are several cues to help you determine your risk comfort level.
- At what point do you and others want to know when a risk materializes and when?
- Are you being informed too frequently on seemingly immaterial risk events?
- How often do you expect risks to occur?
When you have pre-determined the frequency rate and escalation levels you are comfortable with, you will be able to clearly articulate your appetite level for your risks. Use your risk likelihood and impact matrix to visualize your comfort levels.
In the video below, I show you how to use your risk matrix to determine your risk appetite.
High, Moderate, Low, or No Appetite?
Do not get caught up on the label! The label used – high, moderate, low, or no – is meaningless unless you define what it means for you and your business. What you perceive to be a high appetite level can and probably will differ from organization to organization and person to person. Therefore, it is important that you understand and communicate what you mean when you use these labels. If you don’t, it will be subject to the interpretation of those designated responsible for managing the risk. And their interpretation may be different from yours.
There is no right or wrong appetite level. It is truly dependent on your comfort with accepting, maximizing or limiting your risks in order to achieve your business objectives, regardless of whether the level may be deemed inappropriate by others.