On Risk Appetite and Tolerance

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Exploring the Development and Refinement of Risk Appetite and Tolerance

Exploring the journey of developing and enhancing risk appetite and tolerance in organizations, focusing on cultural alignment, quantitative measures, strategic integration, and effective communication for better risk management.

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Welcome to RIMScast. Your host is Justin Smulison, Business Content Manager at RIMS, the Risk and Insurance Management Society.

Justin Smulison interviews three of his favorite people, Lorie Graham, Trisha Sqrow, and Dr. Lianne Appelt, who are the three authors of the new RIMS Executive Report, Developing and Refining Risk Appetite and Tolerance. They discuss how the executive report was conceived and written, and what the challenges were in writing it. The report contains insight and direction on the need for a clear and accessible risk appetite statement and risk tolerance in any organization using ERM. They speak of challenges risk professionals face in setting a risk appetite statement, and why risk appetite is essential for organizations today,

Key Takeaways:

[:01] About RIMS and RIMScast.

[:15] About this episode of RIMScast, coming to you from RIMS Headquarters in New York. We will be joined by past and present members of the RIMS Strategic and Enterprise Risk Management Council to discuss their new RIMS Executive Report, Developing and Refining Risk Appetite and Tolerance.

[:47] First, let's talk about RIMS Virtual Workshops. The full calendar of virtual workshops is at RIMS.org/VirtualWorkshops. On June 11th and 12th, we've got Applying and Integrating ERM. Also on June 11th and 12th, we have Fundamentals of Insurance. On June 18th and 19th, we have Fundamentals of Risk Management.

[1:09] On July 9th and 10th, we have Managing Workers' Compensation. On July 23rd and 24th, we have Claims Management. Other dates for Fall and Winter are on the Virtual Workshops full calendar at RIMS.org/VirtualWorkshops.

[1:27] Let me tell you about the new dedicated RIMScast episode that just went live, sponsored by Otoos, "Accident Prevention — The Winning Formula For Construction and Insurance". I interviewed Dana Kfir, the Director of Customer Success at Otoos about how technology can improve safety on construction sites and how companies can use incentives to drive change.

[1:57] The link to this dedicated episode is in this episode's show notes. It is complimentary for RIMS members and nonmembers. Go check it out! If you are interested in producing a similar special episode of RIMScast that features your organization and is tailored to meet the needs of your audience, reach out to us at Content@RIMS.org or Sales@RIMS.org.

[2:23] The RIMS Canada Conference 2024 will be held in Vancouver from October 6th through October 9th. The deadline for session submissions has been extended through May 30th! Visit RIMSCanadaConference.ca or the link in this episode's show notes to learn more about how you can submit your educational session for consideration at RIMS Canada Conference 2024.

[2:54] As mentioned, RIMS has a new Executive Report called Developing and Refining Risk Appetite and Tolerance. It is available through the link in this episode's show notes and through the Risk Knowledge page at RIMS.org. The report was jointly authored by three of my favorite people, Lorie Graham, Trisha Sqrow, and Dr. Lianne Appelt.

[3:19] All have been featured in the ERM Q&A Series. Trisha and Lorie have both been featured here on RIMScast, and Lianne is making her debut. We're going to talk all about this wonderful new Executive Report that was just released. We'll see where we can extend the dialog beyond the report.

[3:43] Lorie Graham, Trisha Sqrow, and Dr. Lianne Appelt, welcome to RIMScast!

[3:53] I am joined by three of my favorite RIMS members. Two of you are returning to RIMScast. One is making your RIMScast debut, Dr. Lianne Appelt. People might know Dr. Lianne Appelt from RIMS-CRMP Stories, earlier this year.

[4:36] Trisha Sqrow of Marsh is next. Trisha says it's great to be part of the Strategic and Enterprise Risk Management Council. Trisha was with DFW Airport when they received Honorable Mention for the ERM Award of Distinction in 2021.

[5:38] Lorie Graham is "the leading Oracle of ORSA." Lorie was the Vice-Chair and Chair of the RIMS Strategic and Enterprise Risk Management Council. As the former Chair, Lorie kept her word and helped see this paper through.

[6:23] Lianne says that putting together a risk appetite statement or devising risk tolerance levels or the other elements described in this paper are some of the hardest things we do as risk professionals. When this was discussed in the Council, Lianne saw potential value in having a guide with examples for risk practitioners to learn from and use to grow their programs.

[7:54] This paper was Trisha's first project on the Strategic and Enterprise Risk Management Council (SERMC). Through working on this paper, Trisha got to know Lorie and Lianne. She used her knowledge and grew a lot in the knowledge gained from Lorie and Lianne. They divided and conquered, each doing an aspect of the project.

[8:43] Lorie says working on the paper was a shared responsibility. They each had a different perspective, coming from different industries, having different roles, and facing different challenges in their organizations. It was fun to learn from each other.

[9:30] Developing and Refining Risk Appetite and Tolerance is available through a link in the show notes. Lorie says that risk appetite is the direction your company wants to go and tolerance is the amount of variability around that target that you are willing to accept. Tolerance statements are like guard rails. Lorie explains more about risk appetite.

[11:15] Lianne talks about when and how to start developing risk appetite and tolerance. It is discussed in detail in the paper. It depends on the circumstances, your stakeholders, and your leadership team. It can take a lot of input, iterations, and time. Use the guidance of your risk culture and make sure you achieve your objectives as a risk practitioner.

[13:04] Lianne says a big part is understanding the culture and the organization. Risk appetite is usually one of the last things an organization addresses because it is hard. Your impact statements can inform your appetite and tolerance statements.

[14:53] Lorie says the words of the risk appetite statement need to reflect metrics that are important to your business, in the language of the business, and connect to your business goals so people see why it is important. People need to understand the statements. Keep them fresh as the business evolves and the environment changes.

[15:55] Whittling the statements down to one or two sentences can be hard, but it is important. It won't be perfect the first time. See how people translate it into the business.

[16:27] It's RIMS plug time! Webinars! On June 6th, Evident ID makes its RIMS Webinars debut with Uncovering Hidden Risks in Your Third-Party Risk Management Program. On June 13th, our friends at Riskonnect return to present Unlocking the Value of Business Continuity and Insurable Risk Management. There are more to be announced for June and July!

[16:52] Register at RIMS.org/Webinars. Webinars are complimentary for RIMS members!

[16:59] The RIMS ERM Conference 2024 will be held on November 18th and 19th in Boston, Massachusetts. The agenda will be announced soon, as will a call for submissions for the ERM Award of Distinction. I'll have that link up soon on an upcoming episode.

[17:17] Review your organization's ERM program, and if you feel it was successful and you have the numbers and the data to back it up, compile that information and get ready to submit your ERM program for the ERM Award of Distinction.

[17:32] The Spencer Educational Foundation has the goal of helping build a talent pipeline of risk management and insurance professionals. They achieve that goal in part through a collaboration with risk management and insurance educators across the United States and Canada. This also applies to not-for-profit entities.

[17:51] If this description applies to you, you should apply for a Spencer General Grant. The application deadline is July 30th, 2024. General Grant awardees are typically notified at the end of October.

[18:07] The Spencer 2024 Funding Their Future Gala will be held on Thursday, September 12th, 2024 at The Cipriani 42nd Street in New York City. Links are in this episode's show notes.

[18:43] Dr. Lianne Appelt is featured now on the RIMS-CRMP Stories. A link is in the show notes. Lianne speaks of common challenges risk professionals face when developing risk appetite and tolerance statements. A lot of the challenges are interdependent. One challenge is where setting a risk appetite statement and developing tolerance ends up being a compliance activity.

[19:28] For many, it is a "check-the-box" exercise they don't want to spend a ton of time, effort, or energy thinking about how it can add value to the business. They want to do the bare minimum and move on. That leads to another challenge, the "set-it-and-forget-it" situation. If it sits on a shelf or in a Dropbox folder and nobody looks at it, it doesn't add any value to the program.

[20:41] Trisha says some of it is having an unclear value proposition and not relating it to the business or the culture of the organization. People ask, "We're doing fine, there have never been issues, so why do we need this?" The value proposition of appetite and tolerance is that it empowers decision-making throughout the organization. It replaces bureaucracy in decisions.

[21:36] Statements of risk appetite and tolerance allow you to allocate resources properly to bump up tolerance when needed. They help the organization to be more agile. They tie ERM to your business's strategic goals and initiatives.

[22:43] One of the biggest challenges Lorie faced was asking herself, if you set a tolerance and exceeded the tolerance, did you fail? If you exceeded the appetite, did you fail? It's not failure, it's an opportunity to see it coming, know that you're reaching it, and have a strategy before you get there to change your trajectory, risk appetite statement, or goals.

[23:26] Get people on board with the understanding that not hitting the target isn't a failure. As you're developing the program, allow for what to do when you need to make an exception. How does that play into how you report? You want to make it so it's not punitive. You want a culture of people being open about variances. It might be an opportunity to be OK with an exception.

[24:32] You don't want to chase the data and adjust your tolerance all the time, but it's OK to look at what your appetite is, as you go forward.

[24:47] Lianne says another common challenge is the organization's leadership, board or legal team has decided that they absolutely will not put something on paper in terms of risk appetite. That is fairly common in industries like tech, where there is no mandate for ERM. The risk team has to come to the table and demonstrate that value proposition so the leadership understands.

[25:30] If the leadership is adamantly against it, what do you do? That is touched on in the executive report. You can achieve objectives without having a formal risk appetite statement.

[25:48] Lorie has not seen leadership resistance, as she is in the financial industry where risk appetite statements and tolerance are required. She addresses falling out of target for tolerance. If you've done it right, you see it coming and have a risk response plan. Lorie shares a financial example where an action plan is triggered and a crisis is prevented.

[27:13] Trisha and Lianne presented this at RISKWORLD 2024. It was well-attended with lots of audience participation. They had made a similar presentation at the ERM Conference in Denver. The topic has led to more questions and comments than Trisha has ever had at a speaking event. When they put up the QR code for the paper, lots of phones went up.

[28:09] Lianne thought it was fantastic. There were good questions. Lots of people resonated with the challenges Trisha and Lianne presented. Lianne hopes the paper will help guide them on their journeys. If anyone wants to download the paper it is available on the Risk Knowledge page of RIMS.org. Lianne has gotten emailed questions from the session and answered them.

[29:30] Lianne was an extra in Wonder Woman 2. Justin was an extra in Find Me Guilty with Vin Diesel, directed by Sidney Lumet.

[31:14] Lorie looks first and foremost for curiosity in a new hire for ERM. You need to be curious about the cause and effect of things. You also need good data analytic skills, and acumen for making critical decisions, using deduction, and coming to conclusions. With those skill sets, you can be tremendous at ERM risk management.

[31:56] Trisha looks for collaboration. A risk practitioner works with people from all over the organization. She looks for people able to gather and understand people's points of view and meet them where they are, sometimes with persuasiveness. It is important to speak to people at all levels of the organization. ERM is at that strategic level so you'll have to speak with leaders.

[32:59] On top of those great qualities, Lianne adds perseverance and flexibility. Especially in tech, there is constant change and evolution. If something doesn't work the first time, you can't give up. You have to be able to maneuver situations creatively and come up with solutions that speak to the culture of the business. That makes you more collaborative and successful in ERM.

[33:42] This has been such a fun interview. You wrote a terrific paper, Developing and Refining Risk Appetite and Tolerance. We appreciate all you do for RIMS! On behalf of the organization, thank you very much!

[34:11] Special thanks once again to Lorie Graham, Trisha Sqrow, and Dr. Lianne Appelt for joining us here today on RIMScast. They co-authored the new RIMS professional report, Developing and Refining Risk Appetite and Tolerance. It is available through a link on this episode's show notes. We're very grateful to them for all their contributions.

[34:33] We hope to see them in some capacity at the RIMS ERM Conference 2024 in Boston, Massachusetts, November 18th and 19th. More details about that conference are on the way.

[34:46] It's plug time! The RIMS App is available to RIMS members exclusively. Go to the App Store and download the RIMS App with all sorts of RIMS resources and coverage. It's different from the RIMS Events App. Everyone loves the RIMS App!

[35:18] You can sponsor a RIMScast episode for this, our weekly show, or a dedicated episode. Links to sponsored episodes are in our show notes. RIMScast has a global audience of risk and insurance professionals, legal professionals, students, business leaders, C-Suite executives, and more. Let's collaborate! Contact pd@rims.org for more information.

[36:01] Become a RIMS member and get access to the tools, thought leadership, and network you need to succeed. Visit RIMS.org/membership or email membershipdept@RIMS.org for more information.

[36:19] Risk Knowledge is the RIMS searchable content library that provides relevant information for today's risk professionals. Materials include RIMS executive reports, survey findings, contributed articles, industry research, benchmarking data, and more.

[36:35] For the best reporting on the profession of risk management, read Risk Management Magazine at RMMagazine.com. It is written and published by the best minds in risk management. Justin Smulison is the Business Content Manager at RIMS. You can email Justin at Content@RIMS.org.

[36:56] Thank you for your continued support and engagement on social media channels! We appreciate all your kind words. Listen every week! Stay safe!

Mentioned in this Episode:

RIMS Executive Report: Developing and Refining Risk Appetite and Tolerance

RISKWORLD 2025 will be in Chicago! May 4‒7

RIMS DEI Council

Spencer Educational Foundation — Grants Page — Apply Through July 30

RIMS-Certified Risk Management Professional (RIMS-CRMP)

RIMS-CRMP Virtual Workshops

RIMS Strategic & Enterprise Risk Center

NEW FOR MEMBERS! RIMS Mobile App

RIMS Canada 2024 — Submit a session through May 30!

Guests' prior interviews:

"ORSA Reporting: It Seems To Be A Hot Topic with Lorie Graham"