Fundamentals of Risk Management

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Importance of risk appetite 
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(risk capacity). A range of definitions of risk appetite is shown in Table 25.1 and it is 
obvious that different professional bodies have produced very similar definitions of 
risk appetite.
An organization should be able to decide how much it wishes to put at risk, based 
on the attitude of the organization to risk. Agreeing the risk appetite will ensure that 
the organization does not put too much (or too little) value at risk. The risk capacity 
of the organization needs to be fully utilized to ensure that risk taking is at the optimal 
level and delivers maximum benefit. Similarly, the organization should not put more 
value at risk than is appropriate, given the sector in which it operates and prevailing 
market conditions.
The portion of risk appetite that is associated with opportunities can be con-
sidered to be the opportunity investment that the organization is willing to embrace. 
Organizations will be willing to invest resources in opportunities that the organization 
believes will produce a positive gain. However, the organization should recognize 
that value put at risk in this way may not produce a positive gain. Implementation 
of strategic decisions may result in losses. In fact, more value can be destroyed by 
incorrect strategic decisions than by hazard, control or even compliance risks.
The organization may have an appetite for investing a sum of money in an
opportunity, but it needs to be sure that it has the capacity to endure any loss that 
may result. It also needs to be sure that the total amount invested, or value at risk, is 
not beyond the capacity of the organization. Careful identification of the nature of 
the risks and calculation of the actual risk exposure associated with the opportunity 
should be undertaken.