IRM ERM M1U5.6 Designing risk appetite statements

Question 1

Designing risk appetite statements Ex farm machinery manufacturer

Answer 1

A farm machinery manufacturer considering expanding into electronically controlled indoor dairy equipment, aiming to enhance milk yield compared to traditional methods. Although this aligns with industry trends and offers growth opportunities, it involves venturing into highly technical electronic manufacturing, potentially beyond the company’s expertise and leading to costly setbacks.

Before proceeding, the company needs to analyze technical challenges, investment needs, sales potential, competitive landscape, and profit margins. This assessment helps determine the total investment at risk in case of failure, comparing it with the company’s pre-defined risk appetite and capacity to bear risk.

Question 2

6 principles when designing a framework for risk appetite:

Answer 2

The IRM’s Risk appetite and tolerance paper notes six key principles which should be taken into account when designing a framework for risk appetite:

Risk appetite can be complex – oversimplification can cause problems

It needs to be measurable – otherwise risk appetite statements become fundamentally meaningless

It is not a single, fixed concept – there are a range of appetites for different risks that can change with time

It should be developed in line with an organisation’s risk management capability and maturity – the approach should be clear and supported before risk appetite can be understood

It must take account of different views at strategic, tactical and operational levels – to address risk appetite throughout an organisation

It must be integrated with the control culture – to balance risk taking and risk control at the right levels of an organisation and, at the same time, provide assurance that risk management and internal controls are effective

Question 3

Stages for developing risk appetite statements:

Answer 3

Stages for developing risk appetite statements:

Identify the stakeholders and their expectations

Define the organisation-wide risk exposure

Establish the desired level of risk exposure

Define the range of acceptable volatility around each type of risk

Reconcile the current and desired risk appetite and tolerances

Formalise and ratify the risk appetite statement and communicate it

Question 4

Risk Appetite - Driver of the business (banks) or STOC consequence

Answer 4

For some organizations, like banks, risk appetite is a key driver of strategy, shaping decisions on lending and investments.

For other businesses, risk is a result of their activities, and risk appetite serves as a planning tool to assess tactics and projects.

Additionally, risk appetite may reflect organizational constraints, such as authorization levels and expenditure limits, indicating the organization’s approach to risk management.