Research into the Definition and Application of the concept of risk appetite

Research into the Definition and Application of the concept of risk appetiteAirmic, Nottingham University, Marsh

Overview: Risk appetite can be considered as one of the building blocks of an effective risk management initiative. However, there is still considerable debate over the exact meaning of risk appetite, the way in which an organisation should develop a risk appetite statement and how the concept should be applied across an organisation.
This report presents the findings of research undertaken by Marsh Risk Consulting and the University of Nottingham into the definition and application of risk appetite and was coordinated by the Risk Management Steering Group at AIRMIC. It is an important piece of original research work that represents a substantial commitment, both by Marsh and by the University of Nottingham who have proved to be very valuable partners in this exercise and have put substantial resources into undertaking this work.
British Standards published BS 31100 in October 2008. The standard is entitled “Risk Management – Code of Practice” and it offers the following definition of risk appetite “the amount and type of risk that an organisation is prepared to seek, accept or tolerate’. This definition was considered as part of a survey of the AIRMIC membership and the results of that survey are published in this report.
The report seeks to evaluate the current level of ‘maturity’ in the application of the concept of risk appetite. The concept is used in a large number of organisations and British Standard BS 31100 suggests that “setting a risk appetite enables an organisation to increase its rewards by optimising risk-taking and accepting calculated risks within an appropriate level of authority’.
Setting a risk appetite can therefore be seen as a fundamental component of successful risk management and is worthy of detailed investigation. The potential benefits of having a risk appetite statement are set out in this report. It is now for organisations to take the concept, adapt it to their own particular circumstances and gain maximum benefit. I hope that the study helps to stimulate debate and provide real value for its readers.

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