Research

Risk Appetite: An Essential Element of ERM

Another Bite at the Apple: Risk Appetite Revisited

Another Bite at the Apple: Risk Appetite Revisited is the first report in a three-part series on how insurers can use risk appetite more effectively. Towers Watson explores how insurers can enhance risk appetite by improving its articulation through clearer linkages to mission and strategies. Parts 2 and 3 will explore how to operationalize risk appetite by implementing near-real-time monitoring tools and linking enterprise risk tolerances more closely to local risk limits.

Risk appetite is part of the foundation of enterprise risk management, which is essential for an insurer to make good on promises in its mission statement. It allows a company to express an identified set of risk-trading opportunities and set boundaries on its risk trading among those opportunities. By now, most insurers have developed risk appetite statements and discussed them with their boards. But many are questioning the value of the exercise.

Some insurers are questioning whether risk appetite policy statements provide good value when measured against the investment of time and senior management bandwidth. They are concerned that these statements aren’t sufficiently actionable, and that linkages to risk tolerances and limits are tenuous at best. Monitoring actual risks against limits and tolerances in a frequent and timely fashion is another concern some insurers cite.

The focus of many risk appetite statements is on losses to financial capital that are sufficient to impair the mission. Linking risk appetite to mission impairment leads to a broader view of risk appetite. Like the mission, the company’s risk appetite is enduring, but must be adaptive to changes in company circumstances and the external environment.