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Risk Appetite Capital
Empowering risk-based decision-making
At Deloitte, we believe that articulating suitable Risk Appetite Statements (RAS) and deriving a consistent and robust concept of Risk Appetite Capital (RAC) empowers organizations with a risk management tool to effectively integrate Risk Appetite into their decision-making.
Many organizations have established Risk Appetite frameworks consisting of Risk Appetite Statements (RAS). To arrive at an effective RAS, an organization’s board has to concisely articulate what risk really means for the organization. A well-defined RAS describes thresholds for target outcomes, in essence delineating the potential future states into desirable and undesirable outcomes. The conceptual cost for insuring the organization against undesirable outcomes implied by RAS that defines Risk Appetite Capital (RAC).
RAC is a very tangible and fair concept – if appropriately implemented, it aligns the incentives in the organization with the risk considerations articulated in RAS. For example, if real protection against business risks can be purchased, maybe through a captive insurer, the cost of risk is spent as a premium and directly reflects in a reduction of RAC.