Chapter 5 - Risk appetite

Question 1

What does a risk management policy include?

Answer 1

Risk capacity - upper bound for exposure
Risk profile - current risk exposure
Risk targets - desired exposures
Risk tolerance level - breakdown of upper bound/targets
Risk limits - operational guidelines for managers
Risk appeitite - lower of risk capacity and risk profile
Policy towards risk amnagement tools
Links between RM and CM, Strategy, Company circumstances

Question 2

Company’s risk appetite affected by which factors?

Answer 2

Objectives and culture
Business environment
Current level of success
Consideration of level & types of risks to meet objectives
Risk tolerance

Question 3

Board may express risk appetite in terms of:

Answer 3

Solvency level
Credit rating
Earnings and ability to pay dividends
Economic value

Question 4

Risk metrics

Answer 4

Measure whether we are operating within tolerance level

Used to trigger intervention

Uses a range of qualitative and quantitative (KRIs)

Question 5

Risk reporting objectives

Answer 5

Balance between information & clarity/simplicity

Include KRIs

Split risks by operating units

Traffic light approach

Monitor action and allocated person

Question 6

Translating risk appetite into action

Answer 6

Risk management policy
Expressing risk appetite
Establishing risk tolerances 
Risk limits
Risk metrics
Key risk indicators
Risk reporting