It can be extremely difficult to pin down exactly what constitutes a company’s risk appetite and ensuring it is adhered to. No wonder it remains one of the hottest topics in risk management.
How it should be defined, does it go far enough and whether it meets external scrutiny – for example from the rating agencies – are just some of the areas under discussion.
There is debate taking place around how an effective risk appetite strategy should be designed and implemented. While boards bear ultimate responsibility for setting the risk appetite, many risk managers will say this is an area where they want more guidance and not least in the post-Brexit world.
Certainly, it was with some relief that following the referendum the economy has remained strong, despite naysayers claiming it would fall off a cliff. But no one can deny that coming out of Europe is going to mean change and this is particularly true within financial services, which is the UK’s biggest exporter and the country’s largest taxpayer.
We may well see more volatility and boards will now be preparing for different times. They will no doubt be looking hard at where the risk appetite lies and how it should adapt. The deal that is achieved with the European Union is of course extremely important, but this could be the time to seek out new markets and adopt a more agile approach.
And while there is optimism about global opportunities, there are also some darker clouds on the horizon. It’s possible some offices will relocate, potentially weakening London’s position as a leading insurance and investment banking player. Meanwhile in the US, the Trump administration continues to make waves and an import tax could negatively impact on the UK’s financial services industry.
But, with financial services being our strongest suit, we may see the government respond. There has been criticism for many years about the imposition of restrictive European regulations and the lack of a level playing field.
That is not to say the shackles will be coming off. The UK is highly regulated and given the financial crisis and the effects of light touch regulation, is set to remain so. But we don’t know if there could be any easing of solvency requirements, for example, or other moves to improve our competitiveness.
So, there are many forces that could impact on an existing risk appetite and this creates a challenging environment for the risk manager.
This is why there is increasing use of specialist solutions to monitor risk appetite tolerance and technology is playing a vital role.
Indeed, if there are better controls, businesses should be able to embrace more risk if necessary. Advanced software can now allow risk managers to build a customized and categorized framework to set the risk appetite and tolerance levels for individual risks, using either their own or standard templates.
This means problems such as when risk appetite is exceeded can be spotted early and action taken, for example, this could be in tightening underwriting or adjusting pricing.
Ownership can be assigned for all risks, which puts an end to any department or individual seeking to evade responsibility.
Risk managers need fast and tangible information, both quantitative and qualitative, with which to advise their boards. Through having access to this on a real-time basis, they can produce reports of substance, presenting hard facts on risk and capturing actual events. This proactive approach reflects the way risk management is moving, from once producing reactive statements, to having a far sharper focus and becoming integral to business strategy.