Risk appetite, or tolerance, is the amount of risk to which an organisation is prepared to be exposed before it decides action is necessary. It may be unique to a particular type of risk, or it may be more generic in the sense that the total risks which an organisation is prepared to accept at any one time will have a limit.
The Loss Exceedance Curve (LEC) provides a useful way for Senior Leaders to assess if action needs to be taken to address a risk based on the organisation’s level of risk tolerance. It can also show the likely effect of additional controls in reducing the level of uncertainty associated with an activity.
In the case of the Tatton Hill Academy, the LEC shows that the new HR Recruitment and Retention strategy is expected to reduce the residual risk of sourcing permanent teaching staff to an acceptable level.
Risk appetite is a subjective issue, but the maximum acceptable risk should always be identified and documented by the Senior Leadership team.