PRMIA Presentation on Setting and Communication Risk Appetite

The topic for the evening was "Setting and Communicating Risk Appetite”. The overriding premise of the presentation was that an effective communication of the risks actively managed in the pursuit of value creation starts with a meaningful articulation of risk appetite at an enterprise level.

The presentation was made in three parts:

The first part (presented by Andrew Nord)  provided the context in which risk appetite is defined and used to create value at an enterprise level. This was achieved by:

• drawing out the link between risk assessment in setting strategic objectives that ultimately deliver value at an enterprise level;
• defining risk appetite within the context of an enterprise risk management framework;
• providing insights to current practice with respect to risk appetite in non-financial institutions; and
• providing an example of considerations for two major Stakeholders to setting and communicating risk appetite – the Board of Directors, and, a Credit Rating Agency
  

The second part (presented by Barry Smith) provided insights regarding the application of risk appetite within the Financial Services Industry. He spoke of the need for a risk appetite process and of ways to improve the existing process. He went on to present a typical risk appetite statement that includes both quantitative undertakings about solvency, earnings, creditworthiness and liquidity, and also qualitative undertakings about reputational risk and the firm’s willingness to enter or to expand its presence in emerging markets. He concluded with the view that we could consider both the allocation of Economic Capital to business lines, and the disaggregation of the overall Economic Capital allocation into separate risk limits as optimisations based on the desired risk-return trade-off. For this to hold, each business line would need to be treated as an ‘asset’ within the overall portfolio of assets to be optimised, and a simplification of the assumptions about the factors driving market, credit and operational risk would be needed to complete the allocation process.

The third part (presented by Georges Hübner, Deloitte Professor of Financial Management, Department of Accounting, Finance and Law, HEC-University of Liège and Managing Director of Gambit Financial Solutions S.A.) built on the capital and risk optimisation view by introducing a new perspective in quantifying risk appetite within the context of delivering shareholder value (being one of the key value drivers to protect) by applying risk profiling and portfolio optimisations concepts currently used in the private wealth and asset management sector.

In summarising the various presentations, Andrew concluded that management should seek to identify the risks that the organisation faces, measure them and articulate the appetite for them. This needs to be done in a comprehensive and balanced way where quantitative measures are combined with qualitative measures as well as those for which the enterprise may have zero risk tolerance.

Download a copy of the presentation here. If you would like to know more on this topic please do not hesitate to contact us.