Risk Appetite: how much risk do you want to take?

The ‘Risk Appetite’ of your business refers to the level of risk that you are willing to take on. This is one of the most important aspects of risk management because a clearly defined, well-thought-out Risk Appetite will help you to balance between taking too little or too much risk.

Of course, in order to understand your Risk Appetite, you will have to identify your Risk Capacity (how much risk you can really manage) and how much risk you are exposed to. Ideally, you will want to take on risk that is well below the absolute capacity of your business and to plan carefully when you need to take on more risk.

We often think of Risk Appetite in terms of capital investment but it is also important to understand your appetite for operational, reputational and market-place risk. An assessment of your risks in these areas can help to guide your development of Risk Appetite statements and policies for your business.

Good risk-taking rests on a good understanding of risk appetite that is applied throughout your business.