“Risk appetite should be seen as a key part of the business strategy and it should be clearly communicated, understood and monitored within an organization,” says Edward T. Hida II, partner at Deloitte Touche LLP and global head of its risk and capital management practice. “Risk appetite statements can, for example, help spark discussions about risk and governance, influence strategic planning and capital allocation decisions, and reassure regulators, shareholders and rating agencies that the organization has a clear understanding – and has set limits – what risk it can take.” Hida explains. There is often confusion between risk management and risk-taking, with the rigour of the former now restarting part of its soil lost from the indeterminacy of the latter. Risk appetite is a consequence of a rigorous risk management analysis and not a precursor. Simple risk management techniques deal with the effects of dangerous events, but this ignores the possibility of collateral effects of a poor outcome, such as the technical.B solution. The amount that can be put at risk depends on the coverage available in the event of a loss, and a correct analysis takes this into account. The “appetite” logically derives from this analysis. For example, an organization should be “risk-hungry” if it is more than sufficiently hedged relative to its competitors and should therefore be able to achieve higher returns in the high-risk market. The Board of Directors is not the original creator of a risk appetite statement. At the end of the day, it is management`s responsibility. Directors confirm and confirm whether the appetite is consistent with the organization`s strategy and the company`s stakeholders.
Management must first understand the strategy, objectives, risk experiences, risk culture and perspectives of its stakeholders. Once management has an understanding of the company`s values and the culture of risk-taking, it can begin the risk appetite process. When developing a risk appetite, management must analyze the following: Swanepoel has given a very interesting feedback. While risk tolerance and risk appetite are defined, they appear inconsistent and used between risk management programs, he said.