What is your RISK appetite?
The other day, I was having a discussion which led to this Q when someone asked me “what is your risk appetite”? and we went on double clicking this topic to exchange our views. That conversation made me write this article today to share what I know about risk, risk appetite & risk tolerance.
Let’s start with some basics. In the emerging market with technological advancements, new ideas sprout, new requirements come into play, & adapting to the dynamic changes in technologies push us to evaluate organization’s appetite to take risk.
Risk refers to the degree of uncertainty that you need to think, predict and be ready to mitigate. Thus, managing risk through proper risk management process is extremely important. Risk management includes identifying, assessing, and controlling the risks. This is possible only through continuous monitoring and taking the right actions in time.
So what does risk appetite mean in this context? In a simple way, it is the way of knowing how much of it you can take and tolerate. Risk appetite defines the amount of risk you/organization is willing to take to meet the organizational strategic objectives. On the other side, risk tolerance indicates organizational ability to handle the potential risks. It is the measure which indicates how much risk the company can absorb without giving up on their operations.
Risk appetite and tolerance are intertwined, and organizations need to consider them. By knowing the organization’s strategic risk assessment, you sign up for what is the strategic planning and what is & isn’t acceptable for the company.
Importance of risk appetite — the summary:
· Helps to understand where you (as an entity or an organization) stand regarding the risk exposure.
· Helps to have a better control on the financial losses by understanding appetite & tolerance.
· Pushes you to do risk analysis.
· Helps to maximize the returns with proper assessment in place.
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Preethi Guruswamy Sobhitha Neelanath Deeksha Jaiswal Devi Anantharaman Surabhi Kumari Shilpi Mitra
