Creating ‘actionable’ risk appetite statements still a challenge

Towers Watson & Co. announced Wednesday a report on enterprise risk management programs, designed to help insurance carriers establish better links between an organization’s risk and its mission.

The report, titled Another Bite of the Apple: Risk Appetite Revisited, is the first in a three-part series.

“Towers Watson explores how insurers can enhance risk appetite by improving its articulation through clearer linkages to mission and strategies,” the New York-based professional services company stated.

In the report, Towers Watson noted insurers are concerned that risk appetite statements are “not sufficiently actionable” that that links between risk tolerance and limits are “tenuous at best.”

Even defining risk can be a problem, Towers Watson suggested.

“To an equity investor, risk is the downside volatility of the stock market returns,” according to the report, which was written by members of Tower Watson’s Thinking Ahead Group.

“Alternatively, to an insurance regulator it is the possibility of insolvency, leading to unmet policyholder obligations. And, to a manager within a business it is the possibility that his or her performance goals will not be met, leading to a bonus below the target level.”

Towers Watson stated that many firms’ risk appetite statements focus on “losses to financial capital that are sufficient to impair the mission,” but that most firms are just as concerned about “sub-par performance,” even of those do not lead to capital impairment.

Sources of risk could include “a material loss of brand capital or human capital,” as well as loss of governance capital, political capital or cultural capital, Towers Watson suggested in the report.

Towers Watson also discusses the definitions of terms that are pertinent to risk appetite, including risk strategy, risk tolerances, risk preferences view, risk attractiveness and risk limits.

The authors also discuss adaptive buffers, which are resources that allow an organization to “manage through any ‘bumps in the road’ that may occur.”