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The Actuary The magazine of the Institute & Faculty of Actuaries
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Risk appetite increasingly important for maximising business operations

Risk appetite is increasingly important for insurers as part of their enterprise risk management programme, according to a survey by Towers Watson.


23 JUNE 2015 | BY CINTIA CHEONG

Cyber risk with padlock © iStock
Risk appetite is seen as a relevant tool for business operations rather than a requirement for regulatory compliance. © iStock

Risk appetite or tolerance is the level, amount and type of risk an organisation is willing to take in order to meet their strategic objectives.

According to the firm’s eighth biennial global enterprise risk management survey, 76% respondents see risk appetite as “highly important”. The figure represents a 15% increase from 2012, when 61% of insurers cited it.

This is because insurers are seeing risk appetite as a relevant tool for their business operations, rather than a requirement for regulatory compliance, said Towers Watson.

The survey, which polled 398 insurers across all lines of business including life and reinsurance, found more than half (57%) expected further changes to their risk appetite statements in the next two years.

Many insurers now have a firm foundation in place to link their risk appetite to business operations. The survey said 84% had a documented risk appetite statement, compared to 74% in 2012 and 59% in 2010. 

Insurers have also made “incremental progress” with risk limits, which are the amount of risk organisations are exposed to. More than 80% have risk limits in place for governing day-to-day risk taking. 

Mike Wilkinson, Towers Watson’s EMEA risk and Solvency II leader, said: “According to our research, insurers have made significant progress in the development of their risk appetite, which has laid the foundation for links with business operations. 

“This is encouraging, as a meaningful risk appetite is critical to really build your enterprise risk management framework into a useful tool for the business. Risk appetite metrics with risk limits help bring the framework to life for day-to-day risk taking, which has an extra impetus in Europe as Solvency II is implemented.”

However, less than half (47%) said they had set up processes for external communication of risk exposure against appetite. A vast majority (70%) said substantial work was needed to demonstrate consistency in risk limits and appetite.

“Risk appetite is complex, particularly when an insurer has to consider all its different risk types and potentially a range of very different businesses. Companies must understand the impact of risk aggregation and diversification on the overall risk profile of a business,” said Wilkinson. 

“The risk appetite also needs to adapt to changing market dynamics to create an effective risk/reward decision-making process.”