- Risk Identification
- Risk Assessment
- Risk Analysis
- Risk Register
- Risk Appetite and Tolerance
- Risk Management Strategies
- Risk Reporting
- Business Impact Analysis
- What Next?
This chapter is from the book
This chapter is from the book
This chapter is from the book
Risk Appetite and Tolerance
Risk appetite is the total amount of risk that an organization is prepared to accept or be exposed to at any point in time. It drives the organization’s strategic decision-making process and is linked with the organization’s objectives and strategies. Risk appetite may be categorized into three types:
Expansionary or aggressive: Organizations with an expansionary risk appetite are willing to take on more risk for the potential of higher returns. These companies are often in high-growth industries where the benefits of taking a riskier approach can result in significant returns, such as tech startups and investment banking.
Neutral: A company with a neutral risk appetite strikes a balance between being too risky and overly cautious. While they don’t shy away from taking risks, they ensure this is done in a controlled and managed way. These organizations may be mature businesses in stable markets where business growth is consistent and returns are steady.
Conservative: A conservative risk appetite involves low tolerance for risk and a preference for safer investments with predictable outcomes. These companies typically operate in highly regulated industries such as utilities and healthcare, where the emphasis is on stability, safety, and reliability rather than rapid growth.
These concepts are not unlike one’s own personal behavior and risk appetite, even if subconscious. Consider, for example, your own personal values, goals, and objectives. Consider what activities you may or may not participate in, or how you personally choose to invest your savings and so forth.
Risk tolerance is the specific maximum risk that an organization is ready to handle. While risk appetite is about the overall amount of risk an organization is willing to accept, risk tolerance drills down to more specific scenarios or risk categories. Risk tolerance is the degree of variability in outcomes that an organization is willing to withstand.
For example, an organization might have a high risk tolerance for financial risks if it has strong cash reserves, but a low risk tolerance for reputational risks that could harm its brand in the marketplace.
Understanding these two concepts enables organizations to effectively manage risk in line with their strategic goals. They can select projects or make decisions that align with their appetite and tolerance for risk. The risk appetite and tolerance also guide the organization’s risk management activities, determining how they identify, assess, analyze, and mitigate risk.
Together with the risk register, an organization’s appetite and tolerance for risk plays an important role in helping align risk with the goals of the business. The risk register can then provide valuable information and help drive the strategic decision-making process to achieve those goals. It is important that the reporting from a risk register be clear and understandable. The outputs should be available and visible across the business, including to management and senior executives responsible for strategy, budget, and operations.