Understanding Risk Appetite and Risk Tolerance

Devi Narayanan
Mar 30, 2021
3
Minutes

Risk management is the process of identifying, assessing, and managing risks in an organization. In times of uncertainties, the organization looks to risk managers to make crucial decisions about risk management and mitigation. Risk officers are required to bring all stakeholders on the same page and decide on the organization's risk appetite. Risk appetite and risk tolerance are the two essential concepts in risk management around which misconceptions and confusion are prevalent.

What is Risk Appetite?

Risk appetite is referred to as the degree of uncertainty or the level of risk an organization or individual is willing to accept in pursuit of achieving its objectives. If the organization is ready to take on significant risks, then its risk appetite is considered high. If an organization does not want to confront a situation that will affect the company's revenue and want to play safe, then the organization's appetite is supposed to be low.

What is Risk Tolerance?

Risk tolerance is the degree of risk that an organization can withstand. For example, if the management decides that the organization can take the financial risk up to 250, 000 USD, then the tolerance level is agreed about that much amount. Once the risk appetite and tolerance level has been defined, the risk managers can evaluate whether the existing risk framework is adequate. They need to adjust risk management strategies to keep the risks within the risk appetite.

A great understanding of risks and understanding about effectiveness of controls can add value to an organization. VComply’s risk management software provides a centralized system to determine and maintain a register of potential risks for the organization, and evaluate the impact of the risks, and implement controls for the treatment and mitigation of risks. Contact us to learn more about how VComply can help you manage your risks.


About the author

Devi drives growth through content at VComply. When she isn't writing, she's either reading, or traveling.

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