Positive aspects of Aligning Risk Appetite with Business Planning

As the new year gets under way, many insurance firms are starting to get to grips with the execution of the 2025 business plan. Operating in a dynamic and uncertain environment, setting clear and well-defined risk appetites is crucial for navigating complexity and achieving success, probably more so at this time in our history than ever before.

Risk appetites outline the level of risk an insurer is willing to accept across various dimensions, these must be intricately linked to the company's overall business plan if they are to add true value. Unfortunately this is not often the case.

Why is alignment so vital?

Strategic Direction: Risk appetites provide a framework for decision-making, knowing what risks to take more of and which to minimise, is critical to achieving financial success. It will also ensure that all activities, from product development, sales targets, to investment strategies, are aligned and consistent with the company's strategic objectives.

Competitive Advantage: By understanding the unit profitability of each class of business, and managing risk effectively, insurers can differentiate themselves in the market, offering innovative products at the right price to take advantage of each stage of the insurance cycle.

Regulatory Compliance: Clearly documented and communicated risk appetites demonstrate a strong risk management culture and help insurers meet regulatory requirements and maintain consumer trust.

Operational Efficiency: Well-defined appetites can assist in streamlining decision-making processes, reducing the time and resources spent on evaluating and approving individual risks.

Most textbooks will simply state the process to achieving the above benefits with a single line such as: "Translate Business Objectives into Risk Appetite Statements" Which is about as helpful as a chocolate teapot.

Firms find this stage increasingly difficult for one primary reason. Most risk appetite frameworks are created and approved away from the business planning process.

To get true value from a risk framework it needs to be embedded into the processes of the firm and the business planning process is no different.

It is no use stating you want to minimise market risk int he investment portfolio to X% VAR, whilst also having a business plan which has an increase of 50% for investment income.

Risk Appetite Frameworks need to be structured to provide the guidelines, for the successful achievement of the business plan. While being able to provide early warning signs around areas of concern. Pointing management towards early decision making enabling timely mitigation to be put in place.

This should include as much around what risks are acceptable and are to be increased in volume versus those which we want to reduce, Which is only possible if you can match the expectations of the plan to the abilities of the firm to collate, assess and interpret relevant data points. Therefore setting Risk Appetite statements which are based upon what is easily obtainable is very unlikely to be able to provide you with the framework which will be as useful as possible.

Maybe the statement should read: "Start by asking the management and the Board what they want to track and what they worry about within the plan?" Then look at the Risk Appetite Framework with a whole new mindset.

Conclusion:

Aligning risk appetites with business plans is not a one-time event but an ongoing process

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