It’s clear from commentary and my blog’s web traffic data that risk appetite is considered to be the most challenging and controversial parts of ERM. To learn more about these differing perspectives, I invite you to check out this article that includes commentary from various thought leaders.
We are always trying to better understand the concepts of risk appetite and tolerance and how they can be used to make better informed decisions and even take risks in pursuit of value.
A recent interview on risk appetite with Hans Læssøe dives headfirst into this topic.
How did the concepts of risk appetite, tolerance and capacity get to be so confusing? Well, it doesn’t help that the two leading risk management standards, ISO 31000 and COSO, each define risk appetite and tolerance in opposite ways, which makes the application of these concepts even more nebulous.
So how can we understand and harness this tool effectively to build a competitive advantage?
Watch the interview below to learn more.
For a recap of the basics, I invite you to check out my previous article 7 Questions for Understanding the Fundamentals of Risk Appetite. Also, Hans’ book Prepare to Dare (pgs. 83-104) outlines the topic of risk appetite. The interview includes additional commentary that can be helpful in applying this concept in your organization.
Below is a list of major points we discuss for easy reference, but I strongly recommend watching the entire interview:
- Risk universe model (see image) and definitions of risk appetite, tolerance and capacity. (1:00)
- General action steps for each “layer” in the model. (3:40)
- It’s not just about the negative, but about the positive too. (5:20)
- But there’s one problem…it’s all very risk-centric. (6:35)
- A big reason why risk appetite and tolerance are so confusing for many. (8:05)
- Moving beyond individual risk and establishing context. (9:55)
- Why quantitative risk assessment and modeling is necessary. (11:25)
- Speaking a language executives will understand and appreciate (risk vs. performance). (14:35)
- Gazing into the long-term. (18:20)
- Understanding the limits to what your company can handle. (20:10)
- Why risk appetite, tolerance, and capacity are such a huge shift for many in the risk world. (25:35)
- Parting words – stop talking about risks! (29:50)
To conclude, I want to extend a huge thank you to Hans for taking the time for this interview on risk appetite and for helping us better understand this challenging topic and how it can be used to help your company build a competitive advantage.
A quote Hans cites in the interview sums this up well…
“We make money by taking chances, but we lose money when we do not manage the chances we are taking.”
I look forward to speaking with Hans again on this and other topics related to risk and ensuring the company’s success.
Does your company struggle with how to apply the concepts of risk appetite and tolerance to decision-making?
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If your company is struggling to understand risk appetite, tolerance, and capacity and how they can be helpful tools for decision-making, click this link to schedule a one-on-one call with me to discuss your company’s needs and the best way to move forward.