Further thoughts on Risk Appetite

The term Risk Appetite is used often in the insurance industry, as it has in a previous post on this blog. But what exactly is "Risk Appetite"? Is it the upper amount of risk an organization is prepared to accept? Is it relatively fixed and a goal simply targeted? When an organization thinks about how much risk they are prepared to accept have they thought about the actual cost factors that weigh into that decision? Often we think of risk in terms we can quantify on it's most basic level. Examples being how much to insure a building, contents, business income, etc. These examples are fairly easy to quantify, the building costs X amount to rebuild in todays dollars, etc. But a well thought out risk analysis, and quantifying the related limits we are willing to accept, must go deeper into the process. Thought must be given into the controls a business owner puts into place to address risk containment, and if the costs budgeted to address a specific area of risk germane to your particular business, are the most cost efficient way to address the issue. We often think of risk appetite in terms of how much we are willing to spend in insurance dollars to cover our exposures. But if more thought is given to the subject, we can actually save money but going under the surface of the issue to look at other ways to address the issue instead of terms of insurance dollars spent.