Risk Tolerance & Risk Appetite

While the terms “risk appetite” and “risk tolerance” are often used interchangeably, there are small but crucial differences that can be used to differentiate them.  Most of the regulations and standards in the market concentrate on the process if risk management. However, there are a few of these regulations that define the differences between the two terms more clearly.  For your organization to have a reliable cybersecurity program, it’s crucial that you separate risk appetite from risk tolerance to enable you to devise relevant and useful controls.

Risk Appetite Vs. Risk Tolerance: The Difference

What is Risk Appetite? Using the Enterprise Risk Management (ERM)

The ERM method of handling cybersecurity dictate that you should define the type of risk and the level of risk that you consider adoptable without violating your organization’s goals and objectives. For example, if you process payment for retail businesses but want to move to the healthcare industry, you will define the risks associated with the move. If you accept your obligations as stated by HIPAA, then you’ve determined your risk appetite.

Definition of Risk Tolerance

Risk tolerance refers to the level of the risks that you’re willing and ready to take. Your business should only take the risks that can be mitigated using the organization’s laid-down structures or a reliable third-party vendor. For example, you may decide to spread your investment to the healthcare sector. The most significant risk in the industry is the guarding of protected health information from malicious individuals. Before investing, you should evaluate your measures to protect this information and determine if you have the risk tolerance. If not, you should either stop investing in the industry or transfer the risk to a reliable third-party vendor.

Risk Appetite Statement

What is it?

This is a well-written document that incorporates all the risk-based decisions you’ve made for your organization. It should include public financial reports that explain the process of risk decisions candidly. The document is crucial since it ensures that you only pass accurate risk appetite information to the internal and external stakeholders who will directly affect the decisions and objectives of the organization.

Coming up with your Risk Appetite Statement

The International Organization for Standardization (ISO) regularly updates the guidelines for risk management. In 2018, ISO updated the 31000 standards to create a risk management framework ideal for developing a risk appetite statement. According to ISO, crafting a risk appetite statement involves establishing the level of risk an individual is willing or not willing to take. If you use the following steps, you’ll adequately draft an appropriate risk appetite statement.

1.Communication and Commitment

Your risk appetite statement should abide by the organization’s strategies and objectives. The risks you take should not undermine the goals of the business! Communication is a crucial step since it helps you to consolidate different views which ensure that you have a more-inclusive statement.

  1. Define the Context, Scope, and the Criteria to Use in the Organization

Based on the Integrated Risk Management (IRM) guidelines, it’s necessary that you determine your position in the supply chain ecosystem. You’ll have to look at both the internal and external risk-related factors which helps you to determine the tolerable risks.

  1. Risk Assessment: The Design

You need to establish your approach in drafting the risks and the mitigation factors. It’s necessary that you identify and critically analyze the risks to ensure that all your decisions rooted in a valid premise. Once you’re sure of a given risk, you should determine its occurrence probability, events, mitigation controls, and the effectiveness of the controls. If a risk is highly varied, you should consider rejecting it!

  1. Risk Treatment: Implement

The first stage of implementation involves deciding whether you’ll accept, refuse, or transfer the risk. If you accept the risk, have a clear implementation plan with deadlines. Every stage should have the objectives and the reasons for implementation. If need be, you’ll require to use the IT department and the Chief Security Officer to explain the mitigation controls to all the stakeholders.

  1. Evaluate Through Monitoring

You should include credible monitoring techniques in the risk appetite statement. This may include qualitative, quantitative, or a combination of both techniques. Ensure that you have measurement parameters to be used in the continuous monitoring of the data ecosystem. This guarantees compliance with the risk assessment and implementation strategy.

  1. Make Changes based on Records and Reports

When you identify weaknesses in the course of your implementation, you should devise methods to improve the risk management program. Ensure that the changes involve all the concerned parties!

  1. Make a Summary of the Outcomes for Release

You should communicate the contents of the risk appetite statement with the internal and external stakeholders. Ensure that you have a summary of the decision-making process, the risks adopted, mitigation controls, and the commitment to the entire process.





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