Lesson 1.34: Loss exceedance curves and risk appetite
A loss exceedance curve plots, for every amount, the chance of losing more than that in a year. It's the picture of a whole risk portfolio, and it's where risk appetite becomes concrete. A board can't approve 'medium risk', but it can approve 'no more than a 10% chance of losing more than 1 million'. In the lab you read Northwind's approved appetite, check the current curve against it and against the tolerance band, see what the planned programme would change, and write the status a board can decide on.
19 min
You will learn to
- Read a loss exceedance curve
- Express risk appetite as probability and amount
- Tell appetite from tolerance
- Compare current and treated curves
- Write an appetite status for a board decision
Key terms
- Loss exceedance curve
- For each amount, the probability that annual loss exceeds it.
- Risk appetite
- The amount and type of risk the organisation is willing to accept in pursuit of its goals, set by the board.
- Risk tolerance
- The acceptable variation around appetite, usually time-limited.
- Residual risk
- Risk remaining after treatment.
- Risk acceptance
- A recorded decision by an authorised owner to carry a risk.
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