Organizational Risk Appetite and Risk Assessment
Risk appetite is the risk amount and risk type that an organization can be willing to engage in without incurring significant losses. Risk assessment entails identifying the potential risks that an organization is exposed to and finding better ways to manage them. This paper seeks to analyze what risk appetite means, including an example that is practical, recommending the main methods that a company can use in determining its risk appetite, the process of risk assessment, and elaborating the approach I would use in carrying out the assessment of risk.
Risk appetite
Risk appetite broadly gets defined as the type and amount of risk that a company is willing to take for the purpose of meeting the objectives that have been strategically set. It also gets defined as the total impact of risk that an organization is readily prepared to take in the pursuit of the objectives that have been set (Qadan, 2019). Risk appetite goes to the center of how an organization carries out its business. An organization’s risk appetite establishes how the organization gets perceived by the organization’s key stakeholders like regulators, shareholders, customers, employees, and the agencies for rating. The main risk management concept entails an incident reporting and management system that results in communication and insight improvement between collaborating departments, containing and reducing the risks, cutting costs, and improving the efficiency of the organization’s processes. A significant example of risk appetite is when an organization refuses to take risks that could potentially lead the organization into losing its base of revenue. For instance, refusing to invest in a project that is bound to fail or a project whose return estimates are very low.
Key methods for determining risk appetite
There are several methods that are critical in determining an organization’s risk appetite identifying the company’s capacity risk, which sets the limit within which the company is willing to operate and not go bankrupt (Fedulova & Sagaydack, 2018). The risk gets determined by using the risk appetite statement, and the internal auditor gauges the statement of risk appetite against the identified exposure to risk. The risk gets determined by defining the boundaries that are acceptable in which case the members of the board and the management come into an agreement on boundary setting n the probabilities of being more specific on the company’s framework for risk appetite. The next step is determining the risk exposure level that requires to be acted upon as soon as possible. The risk appetite table can evaluate the risk on the basis of the likelihood and impact numbers. Another method is using objectives that are long-term can help determine risk appetite by associating the risk appetite with the strategic objectives that have been set by the organization.
Risk assessment process
Assessment of risk entails a method or process where one makes identification of the factors of risk and the hazards that can potentially cause harm. The individual also evaluates and analyzes the risk that is associated with the hazard. This is the first step in the process of assessing risk, which entails the identification of the hazard or risk (Băbuţ & Moraru, 2018). In this case, one will have to take a look around the organization in identifying the areas or aspects that could potentially be expected to bring about harm. The second step in the process entails establishing how the harm may happen and who may be harmed, which is the injury type that may happen. For instance, if there is a risk of losing money placed in an investment, one will need to establish who will be affected by the loss.
The third step entails evaluating the established possible risks and deciding on the right precautions to take in order to minimize or avoid the risk. Having knowledge of what the hazards are given one an idea of how to deal with the risk. This step is meant to determine whether the hazard can be eliminated or how they can control the risk so that it is less likely that the harm would happen. The fourth step entails recording and implementing the findings of the assessment. In this case, therefore, one puts the assessment results into practice to help minimize the chances of the hazard happening and establish how dXto better manage the risks to minimize harm. The fifth step in the assessment process entails reviewing the risk assessment and making updates to it where necessary. This can entail reviewing the risk assessment annually to ensure that the findings are the same and recording any changes in the assessment.
Risk assessment approach
An approach to risk helps determine the tools, processes, team roles, techniques, and team responsibilities and roles in the management of risk. When carrying out the risk assessment, there are several approaches that one can take when carrying out the tasks in the risk assessment process. The various approaches include a reduction in which one finds ways to mitigate the risk and minimize the potential harm to the affected parties. Another approach is avoidance in which one eliminates the risk or withdraws from taking part in a process that presents the potential of being harmful (Hajmohammad & Vachon, 2016). Sharing is another approach that involves outsourcing or insuring to minimize the level percentage of harm suffered. The approach that I would use is avoidance in that once I have identified the factors of risk and the potential hazard, I will avoid getting involved in such a project if the risks are higher than what the organization stands to benefit from taking such a risk.
Conclusion
Risk appetite and risk assessment are aspects of risk management that are a vital part of an organization. Risk appetite is about an organization’s decision to take certain risks depending on what the organization stands to lose or gain from taking that particular risk. Risk assessment entails assessing the factors of risk and potential hazards that an organization may face, then finding the appropriate ways to manage the particular risks. It is critical that if the loss from taking the risk outweighs the benefit, an organization should consider withdrawing from the project to ensure that there’s minimal or no harm to the organization.
References
Băbuţ, G. B., & Moraru, R. I. (2018). Occupational risk assessment: imperatives for process improvement. Calitatea, 19(166), 133-144.
Fedulova, І. V. & Sagaydack, J. А. (2018). Forming a company’s risk appetite. Науковий вісник Полісся, (1 (1)), 47-53.
Hajmohammad, S., & Vachon, S. (2016). Mitigation, avoidance, or acceptance? Managing supplier sustainability risk. Journal of Supply Chain Management, 52(2), 48-65.
Qadan, M. (2019). Risk appetite, idiosyncratic volatility, and expected returns. International Review of Financial Analysis, 65, 101372.