Defining Your Risk Appetite: The Importance of Taking a Quantitative and Qualitative Approach
A strong risk appetite framework is a core tool for performance management that helps bring discipline to major strategy decisions. Highly recommended for all companies, it is essential for firms considering an ambitious growth strategy or undergoing significant organizational change. It is also critical for firms that are facing market or operational vulnerabilities or that are under pressure to turn around financial performance. The value of a risk appetite statement is more than just as a set of benchmarks, it is also a means of communication. By bringing together the performance of the corporation and its commercial operations in a single framework, it triggers discussion about the key financial drivers and associated risks.
Consisting of only a few pages that should include a crisp statement with clear tolerance thresholds, and a financial model that supports the analysis of risk-bearing capacity, the statement assists senior management teams to reach a consensus with respect to their tolerance for variance and acceptable levels of risk taking. Equally important, it helps management engage with the board of directors—focusing attention on high-level, meaningful targets at the intersection of risk, strategy, and performance.
Developing a Holistic View of Company Tolerances
Effectively prepared and stated, the risk appetite framework helps a company determine, communicate and track is ability and willingness to take risks. This article, a collaboration between the Association for Financial Professionals and Oliver Wyman's Global Risk Center, sets out why companies should make defining their risk appetite a priority. We then suggest strategies for how the framework can be developed and used.
This is the third in a series of papers addressing critical issues for finance professionals being developed by Oliver Wyman and the Association for Financial Professionals. The first article in this series, “The New Weakest Link in Your Supply Chain,” examined how companies can protect themselves against the deteriorating financial strength of supplier and the second,
“Vulnerability, Not Volatility” provides an in-depth review of the role of analytics in a new systematic approach to managing commodity risk.
For more information about the report, click here.
Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].
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