What are some of the best practices for developing and reviewing your risk appetite and tolerance statements?

Risk appetite and tolerance are key concepts in risk management, but they can be challenging to define and communicate. They reflect how much risk you are willing and able to take to achieve your objectives, and how you measure and monitor your risk exposure. In this article, you will learn some of the best practices for developing and reviewing your risk appetite and tolerance statements, and how they can help you improve your decision-making and performance.

1 Understand your context and objectives

Before you can articulate your risk appetite and tolerance, you need to understand your internal and external context, and your strategic and operational objectives. This means identifying your stakeholders, their expectations and needs, your strengths and weaknesses, your opportunities and threats, and your mission and vision. You also need to consider your legal, regulatory, ethical, and social responsibilities, and how they affect your risk profile.

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Isaac Madengu CIP

AVP - Claims West
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Any organization should consider the following with it comes to reviewing & assessing Risk Management Statements 1. Know your Organizations Objectives 2. Create a Structure on Governance 3. Collaborate with all stakeholders on all levels of the Organization 4. Assess the Criteria for your Risk Management 5. Outline your appetite 6. Draw a worst case scenario outline using external factors 7. Outline your capacity 8. Set out KPIs to measure the effectiveness 9. Share & Train the rest of the organization 10. Evaluate and report In conclusion, developing and reviewing risk management appetite is a dynamic process that requires active engagement, monitoring, sharing & training. It is not a one time event.

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Tahmina Day, MBA, CERP

Sustainability Leader | Risk Strategist | Head of ESG
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The process starts with your board of directors and leadership team. They have a vision for a company strategy, values and success. They have to articulate how they are willing to attain that business success. Are they willing to do it carefully and slowly? Or, are they aggressive and unafraid of failure? Collecting all this information will allow you to set the foundation for risk appetite and tolerance statement.

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2 Engage your stakeholders and experts

Developing and reviewing your risk appetite and tolerance statements should not be a solo or top-down exercise. You need to involve your board, senior management, staff, customers, suppliers, regulators, and other relevant parties in the process. You also need to seek input from experts, such as risk managers, auditors, consultants, or industry peers, who can provide insights, benchmarks, and best practices. By engaging your stakeholders and experts, you can ensure that your risk appetite and tolerance statements are aligned, realistic, and informed.

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Tahmina Day, MBA, CERP

Sustainability Leader | Risk Strategist | Head of ESG
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Often, the leadership team wants to know about the peers posture on risk appetite before they make a decision on their own. Most likely you will receive and inquiry from your board and executives asking about competitors' practices. So, be prepared to do your research and explore the market trends to use this intelligence for comparison and analysis.

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3 Use clear and consistent language

One of the common pitfalls in risk appetite and tolerance statements is using vague, ambiguous, or inconsistent language that can lead to confusion, misunderstanding, or misinterpretation. You need to use clear and simple language that is easy to understand and communicate. You also need to define your key terms, such as risk, appetite, tolerance, level, impact, likelihood, and so on, and use them consistently throughout your statements. You can use a glossary or a framework to help you standardize your language and definitions.

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4 Quantify and qualify your risk appetite and tolerance

Another common challenge in risk appetite and tolerance statements is finding the right balance between quantitative and qualitative measures. You need to quantify your risk appetite and tolerance as much as possible, using metrics, indicators, thresholds, limits, or ranges that can help you monitor and report your risk exposure. However, you also need to qualify your risk appetite and tolerance, using descriptive words, categories, scales, or scenarios that can help you express your preferences, attitudes, or expectations. You can use a matrix or a table to help you combine your quantitative and qualitative measures.

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5 Align your risk appetite and tolerance with your risk categories

Your risk appetite and tolerance may vary depending on the type, nature, or source of the risk you are facing. You need to align your risk appetite and tolerance with your risk categories, such as strategic, operational, financial, reputational, compliance, or environmental risks. You can use a hierarchy or a map to help you structure your risk categories and subcategories, and assign different levels of risk appetite and tolerance to each of them. You can also use a heat map or a dashboard to help you visualize your risk appetite and tolerance across your risk categories.

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Joe Salib, CFP®

Financial Planner, Sun Life
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In an investment portfolio, different risk levels should align with the time horizons of different needs. Risk categories should also take into consideration income types and how they are taxed. A risk “budget” is then developed and allocated to the different risk levels within a portfolio. This would result in a smoother outcome, yet with a stronger than average rates of returns.

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6 Review and update your risk appetite and tolerance regularly

Your risk appetite and tolerance are not static or fixed. They may change over time, depending on your objectives, environment, performance, or experience. You need to review and update your risk appetite and tolerance regularly, at least annually or whenever there is a significant change in your context or objectives. You also need to communicate and report your risk appetite and tolerance to your stakeholders, and ensure that they are embedded in your policies, processes, systems, and culture.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are some of the best practices for developing and reviewing your risk appetite and tolerance statements?

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2

3

4

5

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1 Understand your context and objectives

2 Engage your stakeholders and experts

3 Use clear and consistent language

4 Quantify and qualify your risk appetite and tolerance

5 Align your risk appetite and tolerance with your risk categories

6 Review and update your risk appetite and tolerance regularly

7 Here’s what else to consider

Risk Management

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What are some of the best practices for developing and reviewing your risk appetite and tolerance statements?

1

2

3

4

5

6

7

1 Understand your context and objectives

2 Engage your stakeholders and experts

3 Use clear and consistent language

4 Quantify and qualify your risk appetite and tolerance

5 Align your risk appetite and tolerance with your risk categories

6 Review and update your risk appetite and tolerance regularly

7 Here’s what else to consider

Risk Management

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