Risk Management Assignment

Assignment 1

Introduction

Risk appetite is a enterprise risk management that has been widely misunderstood for a while and is still being misunderstood. Risk appetite can be associated with hunger and this is misleading to the meaning of the enterprise risk management. Defining risk appetite is most often the first step to understanding and defining the risk management strategy of an organization. In the enterprise risk management context, risk appetite has been given attention in recent times. A number of definitions exist, most with a link to risk acceptability, but also values and goals. You can have a complete understanding of risk and risk management without ever using the phrase risk appetite. As risk assessment frameworks have evolved

The organization 's board or governing body should set the risk appetite of the organization. Everyone at the highest level of an organization should be involved in the enterprise risk management, because risk appetite statement explicitly describes the boundaries within which management is expected to operate. There is only a few organizations that has developed risk appetite statements successfully. Risk appetite statements is setup to provide a guidance on the types of risk and the level of risk that the specific organization will undertake and willing to take, and the statement provides methods that can be used to inline the stakeholders perspectives with internal management decisions. The ownership of the organization has put the board in place to protect their interest, thus risk appetite should represent the boards limits, not the managements. The boards role in relation to risk is to set risk appetite and tolerance, measure and asses risk appetite. Depending on the experience and abilities of the board of an organization the risk appetite will

They include:

• Understanding the concepts

• Balancing risk and reward

• Using risk appetite and tolerance for more than finance

• Leveraging positive aspects of risk taking

• Evolving risk appetite and tolerance over time

• Communicating risk appetite and tolerance

An organization 's risk appetite can be seen as linked to the returns the organization expects from the transaction and can be expressed quantitatively or qualitatively. There are organization 's that use broad categories, such as high, medium and low to describe their risk appetite, others organization 's base their risk appetite on a calculation of the level of earnings or value of risk.

During risk evaluation an understanding of risk appetite is required. Residual risk ratings are compared with the risk appetite to determine if the risk requires treatment.

Risk appetite has been defined as ‘the level of risk that an organization is willing to accept’1, ‘the amount of risk an entity is willing to accept in pursuit of value’2, or ‘The amount of risk which is judged to be tolerable and justifiable’.