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IAI Actuarial Core Principles · Business Management · Decision-making process, attitude to risk and competition

During a strategy discussion at an Indian life insurer, a director says the firm's decisions should reflect a risk appetite. Which statement best describes a sound approach to attitude to risk in organisational decision making?

The board should define a risk appetite and tolerance aligned with strategy and available capital, and judge individual decisions against it. This gives consistent choices, unlike personal preferences, ignoring variability, or avoiding all risk.

  1. AThe board should set a risk appetite and tolerance in line with strategy and capital, so individual decisions are assessed against itCorrect
  2. BEach manager should rely on personal risk preferences, since the organisation has no single attitude to risk
  3. CDecisions should be made on the highest expected return alone, ignoring variability
  4. DThe firm should avoid all risk, as any uncertain outcome breaches professional duties
  5. Risk appetite should be set once by regulators and never reviewed by the firm

Explanation

An organisation's attitude to risk is expressed through a board-approved risk appetite and tolerance linked to strategy and capital capacity, giving consistency across decisions. Relying on individual preferences produces inconsistent choices. Ignoring variability or avoiding all risk is unrealistic, and firms must review appetite as circumstances change.

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