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Practice paper

Risk appetite: A crucial consideration for effective board risk oversight

Christopher E. Mandel and Soubhagya Parija
Journal of Risk Management in Financial Institutions, 17 (2), 168-182 (2024)
https://doi.org/10.69554/GJRD1826

Abstract

Progressive risk management has, among other things, inferred that effectively managing risk requires significant commitment to a risk appetite framework (RAF) that educates, trains and enables decision makers to make risk decisions in the context of understanding risk-taking capacity, preference and, ultimately, need. The starting point for this assumes a reliable measure of the current levels of risk has already been taken to understand the wherewithal to take incremental risk — taken for its potential to increase value. Yet, the need for commitment and investment by leadership can be hard to secure. Proving the value and reliability of a RAF is also not easily accomplished. Thus, RAFs have not been widely established across different industries, not nearly as much as in the financial services.
Research shows that proving RAFs' impacts on performance is necessary for successful implementation. Both the literature and testimonies of successful practitioners demonstrate that risk culture, strategic priorities, board risk oversight requirements, effective communications to stakeholders, reliable quantification of risk and a commitment to quality decision making that sufficiently considers relevant risks are all crucial to successfully managing risk taking guided by a RAF. Thus, after being properly designed, thoroughly tested and ultimately approved by senior management and the board, a risk appetite strategy (RAS) and RAF can be instrumental in more effectively managing and creating value, ultimately leading to a more resilient enterprise. This paper will delve into the many elements of RAFs, allowing the reader to fully understand why management and governance should support their use. It will cover the challenges that practitioners face and how to resolve them. It will also provide a step-by-step methodology for designing, implementing and operationalising a RAS, including the roles of key players in doing so.

Keywords: risk; risk appetite; risk oversight; risk tolerance; governance; performance; decision making

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Author's Biography

Christopher E. Mandel is full-time faculty at Embry-Riddle Aeronautical University where he teaches enterprise risk management (ERM) and is President of Excellence in Risk Management. His risk and insurance career spans over 40 years, where most of the time he was the senior-most leader of global risk management for several Fortune 500-sized entities, including his last role as chief risk officer for USAA Group. He was named Risk Manager of the Year in 2004 by the Risk Management Society (RIMS) where he served as president and seven-year board member. RIMS awarded him with its lifetime achievement award (Goodell) in 2016. He has numerous certifications and designations including Chartered Property Casualty Underwriter, Associate in Enterprise Risk Management, Risk and Insurance Management Society Certified Risk Management Professional and Associate in Claims, and he holds an MBA in finance from George Mason University. He is an influential, long-term thought leader in risk management and ERM.

Soubhagya Parija is the former chief risk officer at FirstEnergy Corp., a Fortune 500 power utility, and prior to that, for New York Power. He served on the board of RIMS and has had leadership positions both in retail and utility industries. He has had a long career defined by innovation, leadership and a commitment to enhancing risk management practices. He earned an MA in economics from Jawaharlal Nehru University, India, and an MBA in finance from Indiana University. He has also completed the Harvard Business Analytics Program.

Citation

Mandel, Christopher E. and Parija, Soubhagya (2024, March 1). Risk appetite: A crucial consideration for effective board risk oversight. In the Journal of Risk Management in Financial Institutions, Volume 17, Issue 2. https://doi.org/10.69554/GJRD1826.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 17 / Issue 2
© Henry Stewart
Publications LLP

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