The case for setting both an Inherent and Residual Risk Appetite
In the last two blogs, Inherent Risk - It is useful? and Expected and Targeted risks, I discussed the potential value of assessing inherent, residual, expected and targeted risks. In this article, I go one stage further and discuss the potential relevance and value of setting both an inherent and residual risk appetite.
The instigator that prompted me to consider this topic came from a board risk appetite setting session I conducted a short time ago. It was clear that the board was not going to agree on the levels of risk appetite for certain risks as their views were quite diverse.
At one extreme, one director wanted to set high appetites, especially for strategic risk, while another more conservative director was very uncomfortable with this and wished to set much lower appetites. Listening to the conversations it becomes clear that the discussion was at cross purposes.