Grant Thornton's inaugural market study on risk appetite. The Risk Appetite study, the first of its kind, canvassed the views of 43 chief executive officers and managing directors from leading London insurers to define current maturity of practice, answering some of the common questions coming out of the market. Our intention is to conduct this study periodically; monitoring overall progress and trends across the market in relation to risk appetite.

1. Risk appetite
A market study

2. Contents
2 Contents
3 Foreword
4 Executive summary
5 Background
6 Approach
10 Measures
14 Monitoring and reporting
18 Future challenges
19 Conclusion
2 Risk appetite A market study

3. Foreword
Welcome to the first Grant Thornton risk appetite
market study. Recent increased regulatory and
supervisory focus has demanded an articulation
of risk appetite and improved decision making for
organisations and this is the first in an ongoing series of
studies designed to monitor and report on progress and
future challenges across the market.
Our rationale for undertaking the This is purely a study of market
study stems from our discussions practice and is not intended to
with a range of senior market recommend one approach over
participants and their general reaction another, it simply conveys what the
to understanding the concept of risk market told us.
appetite. There was a keen interest
into understanding what everyone
else was doing and how far they
had progressed. We also knew that
demand would be heightened with
timelines looming for delivery of draft
Own Risk and Solvency Assessments
(ORSA), in which the risk appetite
frameworks, high level statements, sub
statements and underlying metrics are
a key component.
Our study set out to define current
maturity of practice, answering some of
the common questions coming out of Stephen Kelly
the market. Our intention is to conduct Risk and Capital Management
Practice Leader
this study periodically; monitoring
T +44 (0)20 7728 3073
overall progress and trends across the M +44 (0)7976 963187
market in relation to risk appetite. E stephen.f.kelly@uk.gt.com
Risk appetite A market study 3

4. Executive summary
The study highlighted the vital nature of engaging the
board in discussions from day one. Persistency in this
regard has been proven to pay dividends. Notwithstanding
this, the time lapse from commencing efforts to gaining
initial sign-off is averaging at 12-18 months.
Those organisations that arrived at the appetite?’ In reality they are symbiotic
conclusion that their risk appetite was in nature and feed back into each other
inferred in their business plan have in a continuous cycle. Companies are
made more significant progress and flexing their risk appetite to accomodate
appear to be better placed to present a the business plan for the coming year,
fully cohesive risk appetite framework. where the business case exists. Where
Respondents discovered that the it does not, plans are being made to fall
vast majority of monitoring metrics within appetite.
already existed within the business. It A commonality of measures were
should be noted that these metrics were arrived at and used by the contributors
heavily driven from the business plan of the study, particularly around
which will not extend to operational ‘Earnings at risk’, ‘Capital at risk’
risk metrics. and ‘Solvency at risk’, with most
An actuarial led approach was, as companies selecting a variety of ‘return
one would expect, more quantitive period’ outcomes ranging from 1 in
in nature and tended to demonstrate 5 year occurrence to 1 in 1000 year
greater progress. However it also occurrence. The 1 in 5 year and 1 in 10
appears responsible for the almost year were found to be driven by the
exclusive focus on insurance and to average board tenure. Almost all were
a lesser degree, investment risk. The found to be measures of different points
risk management led approaches were of the expected probability curve.
found to be more qualitative in nature Most companies have now refreshed
focusing on operational risk issues. their reporting in terms of format,
Additionally they haven’t achieved the frequency and detail, revisiting who
same degree of buy-in to date. receives which report.
High level risk appetite statements The future challenges included
were, in general, narrative in their initiatives to embed the monitoring
structure with supporting sub and reporting measures into business
categories designed from a quantitive as usual (BAU) operations and many
standing. respondents are now progressing to the
As the business plans of our next stage, introducing a suite of BAU
respondents were heavily influencing performance measures in the business
the risk appetite frameworks, which support, not only risk appetite,
companies began to ask the question but contributes to both the business
‘does risk appetite drive the business planning process and the completion of
plan or does the business plan drive risk an organisation’s ORSA.
4 Risk appetite A market study

5. Background
“You cannot separate appetite
from return”
The London insurance Specifically this relates to the issues a comprehensive sense of progress,
around setting risk appetite for the as well as the difficulties and pressure
market is enduring a period organisation and determining how points, one of the most significant
of significant reform as it to translate that risk appetite into findings of these discussions was the
grapples with increasing meaningful day to day operating limits disparity across participants with
and tolerances. It also involves working reference to most aspects of the study.
focus from regulators out how to monitor and report on The waters were muddied further from
and market supervisors, adherence to both high level appetite the inconsistency in the use of related
most pronounced through and lower level limits. Grant Thornton’s terminology. Rather than force the
instinct was that of a market often acceptance of a ‘common language’ the
Solvency II, but also relating
struggling with the most appropriate more mature organisations, in terms
to the market’s own drive approach and facing difficulties in of progress with designing their risk
towards greater operational gaining consensus and buy-in from appetite framework, chose to speak to
efficiencies. Revised capital relevant stakeholders. their varied audiences in a language that
Based on this understanding, Grant those audiences would understand.
requirements and redefined Thornton carried out a series of one to Grant Thornton worked on the
reporting obligations are one meetings with industry participants overarching hypothesis that whilst ‘top
forcing the hand of the who kindly agreed to be involved in an down’ and ‘bottom up’ approaches
informal study to examine the current both come with their own merits, early
industry and within this; approaches, measures, monitoring adopters or those most advanced will be
risk appetite remains one of metrics and reporting formats employed, the participants that manage to combine
the most challenging areas. along with the associated future the two and embed meaningful risk
challenges as seen through the eyes of appetite limits and related processes
the market. This was designed to allow across the organisation. This report
the participants to understand how their relays what we heard from respondents
peers were progressing, to observe the without attributing the various findings
degree to which the regulators were to any one organisation or person. The
guiding this and to understand what were pre-eminence of the Lloyd’s Insurance
the challenges and advantages from the market in this study was the result of
implementation of certain approaches. proximity and ease of access, but Grant
The general enthusiasm and willingness Thornton has brought to bear its own
to share experiences demonstrated the experience outside of the London
degree to which risk appetite is enjoying Market to substantiate more general
its moment in the spotlight. insights and themes.
Spanning the full spectrum of the
London Insurance Market and providing
Risk appetite A market study 5

6. Approach
“This is a journey – and education
of the board is key”
The first and most One of the first things that became wanted to remain part of the majority
apparent was that whilst there was no and so, ‘waiting and seeing what your
significant area refers to single emerging industry standard, peers were doing’ became a strategy in
the approach that our consistent patterns were emerging when itself for some organisations. Given the
participants favoured and certain approaches were employed. degree of transparency and availability
We observed a distinction between of data through knowledge sharing peer
the rationale behind this. the actuarial led approach of some groups in the market, this may become
Our working assumption organisations and the risk management an increasingly viable strategy. However,
was that most companies led approach of others. As may have with resourcing identified as a general
been expected, risk management led challenge, this reactive approach may
would have already started
approaches were qualitative and had not suit smaller operations. Indeed,
articulating their high level an operational risk bias. Actuarial our findings demonstrated that many
risk appetite statements lead approaches while quantitative, of those struggling to make notable
and begun the process of displayed more discipline and, in progress were held back by resource
general, demonstrated greater progress. constraints. In the main, companies
cascading these statements In practice, those who have made wanted to avoid being the trail blazers or
down to low level operating the most headway in successfully falling too far behind, due to both these
limits. In doing so, they defining risk appetite have struck positions attracting additional scrutiny
a balance between a practical led, from supervisors.
may have encountered qualitative risk management method When questioned regarding their
difficulties in maintaining and the more rigorous and disciplined, approach to different types of risk, the
cohesiveness when trying actuarial approach. There was a message was clear that insurance and
further distinction between those that (less so) investment risk are the only
to cascade from the began their efforts from their business areas in which participants were seeking
master statement down to plan and underlying operating limits to make a return. Within that, insurance
subcategory statements. and worked back up (bottom-up) risk was seen as the key focus with one
and those who adopted a top-down respondent commenting:
approach from a high level risk appetite
statement. Those that worked from “While the net position is important,
the ground up were better able to we are an insurance organisation
demonstrate a comprehensive and and as such seek to make a gross
cohesive risk appetite framework. underwriting profit”
In terms of where respondents were
positioned on a continuum, the market It was generally observed that
had adopted a pack mentality. Keen companies see other risks such as
to avoid a public catastrophe, they operational risk or credit risk as
6 Risk appetite A market study

7. 2010 Premium Income
Class of Business Plan Current EPI £ Signed Latest Forecast £ Status Position last Comments
Business Projection £ Premium £ month
A 5554629 4818915 2306651 4744090
B 3994299 3889750 1225633 3832445
C 34484702 34686121 19444258 30263913
D 54998777 74405939 59017289 63585477 Comments on
E 2964938 2673797 2135218 2488334 current status,
recent changes,
F 13341423 12893946 9767164 12983274
and foreseen
G 3813657 3099983 3306938 3590712
changes
H 12056835 21590900 12517968 12274046
I 7131279 6910691 4665524 6168615
J 6686775 5615184 5599111 6168615
K 10951026 8055265 5572418 9851900
L 15810084 18870930 11353116 22319101
Whole £171,788,423 £197,511,421 £136,911,288 £178,270,522 Comment on
Account whole account
unavoidable consequences of being in
business which should not be used as “Successful design and embedding
a measure of appetite but simply be of a risk appetite framework
mitigated against. Fixed limits were demands a huge education and
commonly set for these other risk communication exercise”
categories.
This led to the development of
“We distinguish between risk measures, metrics and thresholds that
monitoring (eg. reserves, better supported senior management
operational risk) and those ones decision making. On average companies
where we have an appetite and seek were taking 12 to 18 months to achieve
a return (eg. insurance and to a initial sign-off on their high level
lesser extent investments)” statement. The statements derived were
generally in narrative form, reflecting
The majority of respondents began the practice by organisations of putting
their efforts with a workshop with narrative principles in place that address
senior management, exploring the the qualitative aspects of appetite
principles and defining a high level including; the terminology used, the
statement of risk appetite. The more time horizons and confidence levels.
advanced participants focused heavily
on educating the board, seeking an “ABC Ltd aim at all times to
effective way of communicating with maintain a 10% buffer above our
them and other significant stakeholders, regulatory capital requirement”
to achieve a consensus. As one
company commented:
Risk appetite A market study 7

8. Approach
Some organisations also surveyed There was a distinct divergence in the
the board and senior management various approaches to achieving the
to capture their views and compared underlying numbers. We observed
these to the internal model results. In a general difficulty in cascading the
some instances, there was a remarkably narrative or qualitative statement into
strong correlation between the sub-risk categories. On reaching this
executive management view and the juncture, companies appeared to be
modelled output. taking stock and considering other
Having agreed the narrative approaches, such as bottom up.
principles many respondents next step At this point some respondents
was to follow with the numbers, as concluded that their business plan will
summed up neatly by one company: imply the organisation’s risk appetite,
with one company commenting ‘we
“Start with the principles, follow with put a lot of effort and discipline into
the numbers” producing our business plan – let’s use
that’.
2010 Gross Incurred Loss Ratio
Class of Business Plan Current Latest Forecast Status Position last Comments
Business Projection GULR% Incurred LR% ULR% month
A 82% 55% 88%
B 58% 3% 60%
C 71% 41% 66%
D 77% 25% 55% Comments on
E 73% 23% 48% current status,
recent changes,
F 71% 21% 100%
and foreseen
G 56% 21% 52%
changes
H 72% 36% 79%
I 77% 16% 68%
J 61% 53% 91%
K 51% 15% 51%
L 71% 50% 75%
Whole 68% 30% 69% Comment on
Account whole account
8 Risk appetite A market study

9. This generally resulted in the categories, allowing companies to make One company, displayed a conviction
measurement of performance by statements regarding their overall risk that their approach was fully cohesive
looking at variation against plan where profile such as: by demonstrating that they could
a high level statement; narrative and cascade down to specific metrics
qualitative in nature, was agreed. The ‘No less than 80% of our capital will and aggregate back to their master
sub-category statements were then support insurance risk’ statement. They extracted their risk
derived from a more quantitative appetite from their business plan using
perspective and the supporting metrics, With the previous year’s appetite a disciplined, actuarial led approach
limits and tolerances were generally measures being used as a ‘Stop / that relied heavily on the use of their
arrived at by measuring volatility of Go’ check as part of the business internal model. They were unique
results against plan. Those companies planning process. Some companies in demonstrating this cohesiveness.
that had made this ‘leap of faith’ had embedded this concept into their However, it was apparent that
concerning the relationship between the governance structures by designing developing and articulating a narrative
business plan and risk appetite found mechanisms to ensure ‘flags’ were describing the qualitative aspects of
that the vast majority of information escalated to the board. If the plan falls risk appetite, such as terminology,
required to monitor risk appetite in the outside of the agreed appetite it will be timeframes/horizons and then
form of metrics and tolerances already flagged and escalated to the appropriate following with the numbers to develop
existed within their management forum (risk committee or board) for the underlying, lower level supporting
information (MI). What followed was challenge and decision. The decision quantitative detail, was a favoured
a completeness check for required MI arising is to either adjust the appetite approach.
rather than a full scale gap analysis. to accommodate the plan or scale
One respondent commented ‘Our back the plan to fall within appetite.
business plan implies our risk appetite, Respondents were then knowingly
therefore we monitor against plan’. taking risk versus blindly taking risk
This then raised the question of which with the rationale behind the decision
is influencing which, does risk appetite documented and evidenced. This
influence the plan or vice versa? In flexible approach appeared to be the
reality one will influence the other most successful, with one organisation
and acts as a bench mark to reflect on commenting
historical performance before agreeing
the business plan for the year ahead. “We are more willing to have a
Where companies had undertaken variable result as we are more likely
an analysis of prior performance over to experience better results on
the preceding 5 or more years, there average while maintaining our risk
emerged a consistency in the application of ruin”
of risk appetite and capital to key risk
Risk appetite A market study 9

10. Measures
We observed that the majority of respondents settled on
a set of measures that, while variations on a theme, were
common to most organisations. These measures, in nearly
all cases, were different return periods derived from the
same Expected Probability (EP) curve.
Net Underwriting Profit All figures quoted in £m
£60
£50
£40
Budgeted Earnings
£30 44.5%
Break Even
£20 27.9%
Profit (£m)
£10
Percentile
£0
70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
-£10
-£20
-£30
-£40 Loss of Buffer
1.2%
-£50
Loss of Regulatory Capital
-£60 0.05%
The graph shows the probabilities of obtaining up to a particular profit. The probabilities of achieving less than the budgeted earnings, and less than the
break-even point are identified, as are the probabilities of losing more than the buffer and losing more than the regulatory capital.
“All measures come from different parts of the same EP curve”
10 Risk appetite A market study

11. Net Underwriting Profit All figures quoted in £m
25%
20%
Probability
15%
10%
5%
0%
-90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30
Profit £m
1 in 10 1 in 2 profit 1 in 50 loss 1 in 200 loss
1 in 5 profit Break even 1 in 100 loss Plan
The graph shows the profits/losses associated with a range of pre-defined probabilities.
As can be seen in the adjacent exhibit
various points along the same curve Example Measures
have been selected to satisfy those areas Earnings @ risk - over the planning horizon
that senior management are particularly
interested in. Capital @ risk – investment return
Solvency @ risk – Regulatory 1:200 measure
“Earnings, liquidity and capital
are what the Board are concerned
about” Value @ risk measures
Regulatory capital ≤ 100% net written premium
The ‘near’ horizon return periods of 1
Desired net combined Ratio at 1:10 years ≤ 125%
in 5 and 1 in 10 years were commonly
selected to reflect the time horizons Desired Net Less Ratio @ 1:10 years ≤ 100%
that were of most interest to senior
management.
Mean – Target return on equity
“1:10 return period was chosen as a 1:5 year – Earnings @ risk – probability of loss
proxy for average Board tenure” 1:200 year – Capital Adequacy Ratio
A selection of the most commonly
1:100 year – Concentration risk
observed measures are shown in the • % split by category ≥70% Insurance
exhibit opposite.
• % RDS ≤ X% of capital
Net tangible assets – Group Measure
% Gross written Premium – Syndicate measure
Earnings loss as a % of Net Assets gross and net.
Risk appetite A market study 11

12. Measures
Net Underwriting Profit All figures quoted in £m
100% 26%
24%
22%
80%
20%
18%
60% 16%
Probability
Percentile
14%
12%
40% 10%
8%
6%
20%
4%
2%
0% 0%
-£120
-£110
-£100
-£90
-£80
-£70
-£60
-£50
-£40
-£30
-£20
-£10
£0
£10
£20
£30
£40
£50
£60
£70
£80
£90
£100
£110
£120
Profit (£m)
1 in 10 profit 1 in 2 profit 1 in 50 loss 1 in 200 loss
1 in 5 profit Break even 1 in 100 loss Plan
The graph shows the probabilities of achieving different ranges of net underwriting profits, and the cumulative distribution of the profit. Profit and loss
probabilities are specified. The profits which are at least achieved at the given probabilities are shown, as are the losses which are at least suffered at
the given probabilities.
Organisations had generally Some statements of appetite assume them to demonstrate they could
undertaken a historical review of past open ‘survival’ of the organisation survive an event that arose from
performance against business plan. following back to back catastrophes. anywhere in their portfolio.
One company revisited the business Some organisations have developed Respondents were found to be
plan to derive a qualitative statement and modelled such scenarios by using making good use of their internal
of appetite, defining how much money a tri-metric/tri-peril approach. This model and where an actuarial-led
they were willing to lose using the approach combines limit information, approach was employed, there was
following underlying metrics: probable maximum loss information a focus on measuring insurance and
and catastrophe model output, underwriting risk.
• Earnings at risk – over the planning coupled with expert judgement to
horizon arrive at an extreme but plausible
• Capital at risk – investment return scenario to test their liquidity limits
• Solvency at risk – regulatory capital and tolerances and answer the
1:200 measure. question ‘do we have sufficient free
funds to survive’. They were seeking
to arrive at measures that allowed
12 Risk appetite A market study

13. Net Underwriting Profit All figures quoted in £m
25% 25
20% 20%
Probability
15% 15%
10% 10%
5% 5%
0% 0%
-40 -30 -20 -10 0 10 20 30 40
Profit £m
Plan Lower Quartile (25% deviation from plan) Upper Quartile (25% deviation from plan)
The graph shows the probabilities of achieving different ranges of profits, along with a volatility measure showing the extremities of 25% deviations
above and below the Plan.
Measure Profit £m
Plan 9.2
25% positive deviation from Plan 19.2 (10.0 above Plan)
25% negative deviation from Plan -4.2 (13.0 below Plan)
Maximum 80.1
Minimum -96.0
Risk appetite A market study 13

14. Monitoring and reporting
Due to the general interest, and in some cases requests
from study participants, this section includes both
sanitised and hybrid examples showing reporting
formats and typical contents generally being deployed
across the market.
Enquiries and discussions under this
area of the study highlighted the fact Quarterly monitoring of risk triggers
that the majority of respondents were Risk Triggers Quarter 1 Quarter 2 Quarter 3 Quarter 4 Comments
in the midst of revisiting and indeed
redesigning their reporting formats and
Risk 1
the content. In some cases companies
were revising committee structures.
Given the varying size and
complexity of insurers that we engaged Risk 2
with as part of this study, we observed
some form of proportionality in
action. For example, most companies
Narrative
had a small number of committees Risk 3 comment
that would receive risk management explaining
reports, others had up to six quarterly
movements
committees comprising for example:
Risk 4
• Underwriting Committee
• Management Committee (dealing
with operational issues)
• Finance Committee Risk 5
• Reserving Committee
• Risk and Capital Committee and
• Delegated Underwriting
Committee. Risk 6
In a number of cases, management
information while produced monthly
was reported quarterly. A number of basis. We observed that, in a number of by risk category, had in an effort to
organisations were reappraising the instances, insurers were redesigning or embed it into the business, structured
reporting frequencies for different indeed designing for the first time, risk their statements by function/practice
risk categories though one common dashboard reports or ‘flash’ reports area: pricing, exposure management,
theme was the use of the Own Risk with the information specifically credit control and business planning.
and Solvency Assessment (ORSA) as targeted for the end users.
a vehicle for reporting summary risk Some companies, rather than
appetite information on a quarterly organise their risk appetite statements
14 Risk appetite A market study

15. Likelihood and volatility of risks in and out of appetite
Critical
Significant
Minor
Unlikely Likely
Capital risks Insurance risks Liquidity risks Market risks Insurance risks
There was a definite trend towards such as exposure management reports in most situations that these metrics
companies marrying risk management addressing catastrophe risk. These already exist and are generally being
information (using a variety of risk range between 20 to 25 pages with a reported as part of the current suite of
appetite monitoring metrics) and single page dashboard for the board. management information. This reflects
performance management information. Similarly, it is common for the Chief the growing recognition among insurers
Indeed a number of organisations had Risk Officer report to cover the whole that their business plan implies their risk
developed online dashboards with a risk management process. However it appetite, and by inference monitoring
screen for each of their supporting could be seen that a number of insurers performance against plan is a proxy for
risk appetite statements. In general were making efforts to present risk monitoring risk appetite. This avoids
companies were reporting monthly information in a wide variety of formats the development of standalone risk
by exception across areas such as large to meet the needs of the wide variety of monitoring metrics that have limited
losses, breach of tolerances and control users of the information. business use.
effectiveness. A number of standing With respect to the monitoring of
reports remain comprehensive in nature risk appetite metrics, it is apparent
Risk appetite A market study 15

16. Monitoring and reporting
We were keen to discover Underwriting risk Red Level Amber Level Green Level
the way companies were Appetite statement
handling risk appetite
Amounts written in each class are > x% y% to x% < y%
reporting including the not to exceed x% of ABC’s book
as whole
format, frequency and
Deviation from average line written > x% y% to x% < y%
sorts of data captured. Our not to exceed x%
hypothesis being it was
Planned LR not to be exceeded > x% y% to x% < y%
clear that the reporting by x%
of risk appetite should
Reserving risk Red Level Amber Level Green Level
leverage a whole raft of Appetite statement
data that currently exists.
Deterioration of reserves is not to > b% c% to b% < c%
It would just need to be exceed b% in any one quarter
interrogated to the required
1-in-200 deviation not to exceed > b% c% to b% < c%
level of granularity and b% of gross income
presented in the most Credit risk Red Level Amber Level Green Level
meaningful format to suit Appetite statement
the audience. A particular
more than p% exposure to be
No > p% q% to p% < q%
challenge was the setting held by any one counterparty
of threshold metrics to
Aged debtor position is not to > k days m to k days < m days
measure volatility on a exceed k days
whole account and by line Reinsurance risk Red Level Amber Level Green Level
of business. This was seen Appetite statement
as a key measure.
Exposure to any single reinsurer y% to x% z% to y% < z%
is to be less than x%
Aged debtor position is not to > k days m to k days < m days
exceed k days
Ensure that reinsurers have a Any rating less
credit rating not less than AA than AA
16 Risk appetite A market study

17. Typical reporting structures and Operational risk Red Level Amber Level Green Level
formats state the target risk appetite, Appetite statement
RAG rates the deviation against the
selected metrics supplemented with tolerance for acceptance
Zero Any risk
explanatory narrative text. With some of risks outside of the approved
companies comparing total capital business plan
consumed to available funds. We also tolerance for regulatory
Zero FSA reprimand
found that most organisations were interventions such as FSA s166
making a concerted effort to build
Tolerate material IT systems failure
> v hours w to v hours < w hours
monitoring of risk appetite into their for no more than v hours
business as usual operations which
will ultimately ensure the reporting
Market risk Red Level Amber Level Green Level
process becomes more embedded
Appetite statement
within the organisation. Risk appetite
was generally reported in dashboard probability of negative return
The x% y% z%
form, monitoring targeted risk appetite in any year should not exceed x%
performance against deviation from a
do not expect to lose q% of
ABC q% p% r%
set of metrics defining acceptable and
capital due to FX risk more than
unacceptable thresholds. Dashboards once every B years
were supported by a narrative,
detailing the findings across the Liquidity risk Red Level Amber Level Green Level
quarter. Appetite statement
At a minimum, hold sufficient Funds fall short (100-a)% (100-b)%
funds to meet estimated of estimated
liabilities when they fall due liabilities
Liquidity must be sufficient to Insufficient (100-c)% (100-d)%
meet an RDS event without to cope with
unnecessary cost to ABC simulated RDS
“A distinction is generally drawn between monitoring and appetite”
Risk appetite A market study 17

18. Future challenges
Many companies cited ‘going live’ with new committee
structures, reporting formats and frequencies.
There was a general acknowledgement Many organisations were considering
that transitioning into business as usual allocation of capital across lines of
would be an iterative and educational business and looking to build on the
process. Some organisations are work to date to introduce some form of
looking at developing ‘entity level risk risk adjusted return on capital.
tolerances’ as well as grouping those A key future challenge is that of
tolerances across the business. Other finding thinking time and breathing
companies were undertaking a proof space to conduct much needed analysis.
of concept around their risk appetite A number of organisations have targeted
framework , testing how it sits together the automation/industrialising of risk
and works in practice. The message appetite reporting as key to the objective
was clear that there was more work of achieving more time analysing – and
to be done to fully understand the less time producing.
risk exposures of many businesses.
“We want to determine how much
capital is being consumed by line
of business and compare that
with available capital”
18 Risk appetite A market study

19. Conclusion
Grant Thornton observed a broad range of practices
in the market, each with varying degrees of success.
Respondents had adopted a pack mentality when it
came to progress, eager not to draw undue attention to
themselves from supervisors, either by leading the pack
or lagging behind.
On the whole, the market has made That progress aside, there is an
strong progress that has been enabled underlying danger that other areas
through iterative education of the of risk may be being overlooked,
board and senior management. operational risk for example; with
Unsurprisingly, given the need to history indicating that this is the
introduce greater quantification most consistent driver in the collapse
respondents made a conscious decision of insurance companies, e.g. Sharma
to focus the majority of their efforts 2002, and Ashby and Sharma 2003. In
on insurance risk and, to a lesser conclusion, any high level risk appetite
extent, investment risk. Within that framework that is not balanced in its
we observed significant progress inclusion of other significant areas of
in underwriting, with a variety of risk, irrespective of whether or not
monitoring metrics derived from the they generate a return, may be sub
business plan and appropriate triggers optimal in its effectiveness.
and thresholds reporting on volatility
of results against plan.
For more information please visit:
www.grant-thornton.co.uk/riskappetite
Risk appetite A market study 19

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