In a recent Own Risk and Solvency Assessment webinar conducted by FTI Consulting, more than 50 percent of attendees stated they had not adequately defined risk appetite as part of their ORSA implementation plans. Since understanding risk appetite is the key to implementing a risk management program aligning business activities with strategic goals, this figure is surprising.
Executive SummaryA risk appetite statement is the cornerstone of risk management, according to FTI Consulting's Jim Toole and Matt Stahl. Here the consultants map out the steps insurers can use to develop and apply risk appetite effectively.
What is a risk appetite statement?
A risk appetite statement documents the types and amounts of risk an organization is willing to accept in order to achieve its business objectives. An organization’s strategic goals should be the driver of its risk philosophy, which is defined through a disciplined process that involves setting risk preferences, articulating specific risk tolerances (e.g. high, medium and low), then establishing risk guidelines, rules, policies and controls. The strategic goals are linked with the company’s primary corporate financial objectives, for example to achieve an underwriting profit of a certain level, preserving capital adequacy, maintaining liquidity or protecting franchise value.