Eric Campbell [email protected] Risk Appetite & Risk Tolerance Improving their application from the Abstract to Concrete in your existing Risk Framework
Risk Appetite & Risk Tolerance: Improving their application from Abstract to Concrete in your Existng Risk Framework
Apr 16, 2017
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Eric Campbell [email protected]
Risk Appetite &
Risk Tolerance
Improving their application from the Abstract to Concrete in your existing
Risk Framework
2 Eric Campbell [email protected]
Nicely Done Don Rumsfeld
The UnknownAs we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don't know We don't know.
—Feb. 12, 2002, Department of Defense news briefing
3 Eric Campbell [email protected]
Vague terms defined by vague terms
Accounting • Probable• Highly Probable• Likely• Material
Risk Management• Risk Capacity• Risk Appetite• Risk Tolerance
When would these definitions change?
4 Eric Campbell [email protected]
Risk
Capacity
Risk Appetite
Risk Tolerance
Risk Target or Range
Risk Limits
Starting Point: Hierarchy
Market
Credit
Operational
Risk Appetite, Tolerance, and Limits are not static. Drivers include market events, weather, economy.
5 Eric Campbell [email protected]
Capacity
= Able
Appetite = Willing
Tolerance = Maximum per
broad classification
Target or Range = Optimal level desired
Limits = Threshold to control
Shaping the Definitions
Market
Credit
Operational
Set it too high, can lead to disaster.
Set it too low = opportunity loss.
6 Eric Campbell [email protected]
Capacity=
Least desired
Appetite = If further short of “Range” thanIs covered by your first source of relief
Where does relief come from?
Tolerance = if short of making your “Range”
What is the first source of relief?
Target or Range
Limits
Defined with Consequences
Forecast, Expected Range
Reserves, Rate Pass Through Mechanism, Budget Cuts
Rate relief, other suboptimal resources
7 Eric Campbell [email protected]
The Roles in Defining Risk Capacity, Appetite, Tolerance
• Approving Values• Approving the Risk Management Levers • Measuring the Risk• Reporting the Risk• Building the model • Owning and Feeding the Model• Adjusting Values as the environment
changes
8 Eric Campbell [email protected]
0
100
200
300
400
500
600
Oct-09
Nov-09
Dec-09
Jan-1
0
Feb-10
Mar-10
Apr-10
May-10
Jun-1
0Ju
l-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
RISK RANGE
RISK TOLERANCE
With a clearly established value and description of how risk tolerance is calculated, and a resourced process around it, you are on the right path for avoiding surprises.
Familiar?
9 Eric Campbell [email protected]
Further Development
Teach,Sell
•Risk Terms in context with consequences and actions
•Awareness
•Process
•Model
• Measure
•Monitor
•Report
•Take Action
UseBuild
10 Eric Campbell [email protected]
Discussion• I am interested in your ideas and
experiences in establishing and utilizing the terms “Risk Appetite” and “Risk Tolerance”.
• Recent discussion I have been following on this is on Linkedin on the ERM Association Group.
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