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How to Design and Implement a Risk Strategy
Table of
Contents
What is a Risk Strategy?
Risk strategy refers to the plan and approach that an organisation or individual uses to identify, assess, manage, and mitigate risks. It involves creating a structured framework to handle potential threats and uncertainties that could negatively impact objectives, projects, or operations.
What is an Example of Risk Strategy?
A financial services firm implements a comprehensive cybersecurity programme to protect against data breaches and hacking attempts. The firm invests in advanced firewall and antivirus software, conducts regular security audits, and provides ongoing employee training to recognise and avoid phishing scams. Additionally, the firm purchases cybersecurity insurance to cover potential financial losses and continuously monitors IT systems for signs of threats. This strategy helps the firm mitigate the risk of cyber attacks by ensuring the security of sensitive client information and maintaining regulatory compliance.
What Supervisors Expect from a Risk Strategy
Supervisors worldwide expect a risk strategy framework to be both strategically aligned and regulator-credible. That means showing how risk appetite, capacity, and governance connect directly to prudential resilience and long-term sustainability.
ICAAP/ICARA (UK/EU)
Evidence that risk appetite, tolerance, and capacity link to capital and liquidity adequacy.
Basel Framework (Global)
Capital, liquidity, and leverage requirements must reflect the board’s risk appetite and business model.
MAS (Singapore) / HKMA (Hong Kong)
Emphasis on enterprise-wide risk governance, outsourcing and third-party resilience, and board accountability.
SREP (EU)
Review of governance, culture, and frameworks when setting capital requirements.
Federal Reserve / OCC (US)
Strong focus on governance, board oversight, and stress testing (Dodd-Frank, CCAR).
RBI / SEBI (India)
The Reserve Bank of India and SEBI require banks, NBFCs, and listed entities to integrate risk management with capital planning, stress testing, and corporate governance disclosures, with specific focus on credit, market, and operational risk.
PRA/FCA (UK)
Risk strategy must support operational resilience, protection of critical services, and orderly wind-down or recovery.
APRA (Australia)
CPS 220 requires a board-approved risk management strategy linked to capital and liquidity planning.
CBIRC / PBOC / CSRC (China)
Chinese supervisors emphasise capital adequacy, liquidity buffers, and systemic risk prevention, with strong expectations for board accountability, connected lending governance, and comprehensive stress testing.
Who Owns the Risk Strategy and Mandate?
A risk strategy framework is only effective when ownership and accountability are clear.
Board of Directors
The Board sets the overall mandate, approves the risk strategy, and ensures it aligns with business purpose, ambition, and long-term sustainability. The board defines which risks are acceptable and requires evidence that management operates within those limits.
Senior Management
Executives and senior managers own the operational delivery of the risk strategy within their functions. This includes allocating resources, embedding appetite into day-to-day decision-making, and ensuring that risk-taking stays within agreed parameters. Senior leaders are accountable for escalation when limits are approached or breached.
Chief Executive Officer (CEO)
The CEO carries executive accountability for executing the risk strategy. The CEO ensures that business plans, transformation programmes, and cultural expectations align with the board’s mandate and the CRO’s oversight. They set the tone for leadership behaviours and ensure risk is treated as a strategic enabler, not just a compliance function.
Audit & Risk Management Committee (ARC)
ARC provides specialised oversight on behalf of the board. The ARC ensures that the risk strategy is robust, appetite and capacity are credible, and controls are effective. It reviews risk reporting, challenges management assumptions, and tests whether escalation is working in practice. The ARC also ensures internal audit and external assurance findings feed back into strategy.
Chief Risk Officer (CRO)
The CRO acts as the guardian and translator of the mandate. The CRO ensures that risk appetite, tolerance, and capacity are clearly defined, embedded in capital and operational planning, and monitored against business objectives. They provide the board with transparent reporting, independent challenge, and early warnings when thresholds are at risk of being breached.
Internal Audit Function (IA)
IA provides independent assurance that the risk strategy and framework operate effectively. Internal audit evaluates whether risk management practices, governance structures, and controls are working as designed. It reports directly to the ARC and the board, ensuring assurance is free from executive influence and feeding supervisory expectations for independent validation.
Implementing Integrated Risk Management
Your risk strategy only delivers value when it is embedded within an Integrated Risk Management Framework™. This framework connects appetite, tolerance, and capacity to strategy, governance, and culture. It enables organisations to anticipate complex, interconnected risks — from supply chain disruption and operational resilience to third-party dependency and ESG. By mapping these exposures early, boards and executives can align decisions with capacity and strengthen resilience across the enterprise.
How Does Risk Strategy Link to Business Strategy?
A risk strategy is business strategy expressed through risk.
Leaders must decide:
Which risks to pursue to achieve growth, transformation, or innovation.
Which risks to avoid because they threaten capital, resilience, reputation, or regulatory compliance.
This dual approach ensures a risk strategy focuses and enables ambitions and strategic goals. For example, a financial services firm may accept higher operational and conduct risks to expand internationally, while maintaining zero tolerance for financial crime or local regulator (e.g. PRA/FCA) compliance breaches.
Downloadable How To Guide
Step-by-step guide to:
Risk Strategy Definition
Creating and embedding an effective risk strategy is crucial for safeguarding your organisation against potential threats, dealing with volatility and uncertainties, and ensuring long-term sustainability.
This guide provides a comprehensive, step-by-step approach to help you define and implement a robust risk strategy tailored to your organisation’s unique needs and objectives.
Why do you Need a Risk Strategy?
This is a proactive and systematic approach to managing uncertainties and potential disruptions. It is an essential component of overall organisational management, contributing to resilience, sustainability, and the achievement of business strategic objectives. Here are several reasons why this is crucial:
Proactive Risk Management
It enables proactive risk management rather than reacting to issues as they arise. It also enables you to distinguish the risks inherent to what your organisation does and its objectives, from the unnecessary and as such undesirable risks. This approach allows for the development of plans and strategies to minimise the impact of undesirable risks before they occur, while optimising risk-taking for those risks your business needs to take.
Resource Allocation and Optimisation
All commercial and non-profit organisations have limited resources, and it helps to prioritise where these resources should be allocated. The distinction between desirable and undesirable risks enables you to mitigate the risks you should not have or not to spend money on risks inherent to what your organisation does. By focusing on the most significant risks, you can optimise their resource allocation for risk mitigation.
Enhanced Operational and Financial Resilience
By systematically addressing potential risks, you can enhance both your organisation’s operational and financial resilience. This means you are better equipped to navigate challenges, adapt to changes, and continue operations even in the face of unforeseen events.
Identification of potential threats and opportunities
It helps to identify potential threats and uncertainties that could affect the achievement of your goals. By understanding and acknowledging these risks, you and your team can take steps to mitigate or manage them effectively.
Protecting Reputation
Managing risks effectively can help to protect your business' reputation. Responding to and recovering from a crisis is often easier when there is a pre-established risk management strategy in place.
Risk Culture and Employee Engagement
The effectiveness of risk management is profoundly influenced by the human elements within your business. Cultivating a robust risk culture is fundamental, where transparency, risk-aware behaviour, and proactive management are ingrained in the business' ethos. Leadership plays a pivotal role in shaping this culture, setting a precedent through their actions and communication. Equally crucial is the active engagement of employees at every level; they must be well-informed, risk-aware, and fully integrated into the risk management process. Regular training sessions, workshops, and simulations can significantly enhance their ability to identify and respond to risks effectively.
Decision-Making Support
It provides a framework for decision-making at all level of your business. It helps decision-makers understand the potential risks associated with different choices and guides them in making informed decisions that align to your risk appetite. This also involves incorporating risk assessments into strategic planning, project development, resource allocation, and other decision points. Decision-makers are equipped with information about potential risks and the impact of choices on risk exposure.
Regulatory Compliance and Governance
In certain industries, there are regulatory requirements that mandate the implementation of risk management processes. A risk strategy ensures that your regulated activities comply with these regulations and follows good governance practices.
In addition, the organisation establishes a governance structure that includes clear roles and responsibilities for managing risks. There may be a dedicated risk management team or individuals within existing roles who are accountable for overseeing and implementing risk strategies. Regular reporting and communication channels are established to keep stakeholders informed.
What Do Supervisors Expect from a Risk Strategy?
Supervisors around the world take different approaches, but the underlying expectations are consistent. In any jurisdiction, your board and CRO should be able to answer these challenge questions with evidence
Alignment
How does your risk strategy explicitly connect to your business model, strategic objectives, and transformation programmes?
Governance
How does your board, Audit and Risk Committee, CRO, CEO, and senior management each own and deliver the risk strategy in practice?
Resilience
What evidence do you have that breaches of appetite or tolerance are identified quickly, escalated effectively, and acted upon by the right decision-makers?
Consistency
For multinational firms: how do you ensure that risk appetite and governance are applied consistently across regions, while meeting local regulatory expectations?
Capacity
Can you demonstrate that your risk appetite and tolerance are consistent with your capital, liquidity, and funding capacity — and updated through ICAAP/ICARA, SREP, or equivalent?
Escalation
What evidence do you have that breaches of appetite or tolerance are identified quickly, escalated effectively, and acted upon by the right decision-makers?
Adaptability
How do you update your risk strategy in response to supervisory feedback, stress test outcomes, and emerging global risks (e.g., ESG, cyber, supply chain disruption)?
How to Develop a Risk Strategy?
When will you Need a Risk Strategy?
Ideally, the development of a risk strategy should be considered in conjunction with the creation of a vision and mission statement, and it should be an integral part of your overall strategic planning process.
By integrating risk management considerations early in the strategic planning process, you ensure that their risk aligns seamlessly with your organisation’s vision, mission, and overall strategy. This holistic approach enables a proactive and strategic management of uncertainties, contributing to the organisation's long-term success and sustainability.
Start-up
Phase
During the initial business planning phase, it's important to identify potential risks related to market entry, product development, and initial funding.
More specifically, when seeking initial funding or investments, a risk strategy helps to present a comprehensive plan to investors and mitigate financial risks.
Sustainability and Long-term Planning
As the business plans for long-term sustainability, implementing a risk strategy helps manage environmental, social, and governance (ESG) risks.
Developing a risk strategy for crisis management ensures the organization is prepared for unexpected events such as natural disasters, economic downturns, or public relations crises.
Growth and Expansion Phase
As the business begins to grow and scale its operations, it’s crucial to manage risks related to increased production, a larger workforce, and expanded market reach. This also includes optimising processes to maintain efficiency and profitability and upgrading infrastructure.
When planning to enter new markets or regions, a risk strategy is essential to navigate regulatory differences, cultural nuances, and competitive dynamics.
Transition
Phase
During leadership transitions or significant organisational changes, a risk strategy helps manage uncertainties and ensure smooth transitions.
When changing or evolving the business model, a risk strategy is critical to assess potential risks and ensure successful implementation.
🔄 Note on Adaptability: Keeping Your Risk Strategy Relevant
A risk strategy is never static. Supervisors, investors, and boards increasingly expect firms to demonstrate that their approach to risk evolves continuously in response to:
Supervisory Feedback: Risk appetite statements, capital planning, and resilience frameworks should be updated following ICAAP/ICARA reviews, SREP findings, or regulatory examinations. Documenting how supervisory feedback is embedded strengthens credibility.
Peer Benchmarks: Comparing governance practices, capital buffers, and escalation thresholds with industry peers helps identify blind spots and areas for improvement. Firms that benchmark regularly are better prepared for regulatory scrutiny and stakeholder questions.
Global Priorities: Emerging issues such as climate risk, ESG disclosures, third-party resilience, AI governance, and geopolitical disruption require periodic recalibration of appetite, tolerance, and capacity. Risk strategy must show how these risks are anticipated, not just reacted to.
👉 Key takeaway: Adaptability ensures that your risk strategy remains aligned with strategic ambition, credible in the eyes of supervisors, and competitive against peers. A static strategy quickly becomes a liability in a fast-changing risk environment.
Is Risk Strategy a Framework?
A risk strategy is not the same as a risk framework. The risk strategy outlines the organisation's approach and objectives for managing risk, while the risk framework provides the detailed procedures and tools necessary to implement the strategy effectively. Both are essential for comprehensive risk management and completely interconnected.
👉 Explore our Step by Step Risk Strategy Definition Framework
Interdependence
The risk strategy provides the high-level direction and objectives for risk management, while the risk framework offers the structure and processes needed to achieve those objectives.
Implementation
The risk framework defines the day-to-day execution of the risk strategy, operationalising it.
Alignment
To guarantee the coherence and effectiveness of the organisation's risk management efforts, both must align.
What are the Key Components of a Risk Strategy?
Effectively managing risk is crucial for any organisation's long-term success. A well-crafted risk strategy provides a comprehensive framework to identify, assess, and mitigate risks in alignment with the organisation’s objectives. To address all potential threats proactively and systematically, it is essential to understand the key components of a risk strategy. Here are the critical elements that constitute a robust risk strategy:
Risk Management Goals
Risk management goals are specific objectives that an organisation aims to achieve through its risk management activities. The design of these goals supports the organisation's overall strategy and ensures effective risk management, thereby enhancing the organisation's ability to achieve its mission and vision.
Example: A tech company may set a risk management goal to reduce cybersecurity incidents by 50% within the next year through enhanced security protocols and employee training.
Risk Tolerance
Risk tolerance refers to the acceptable variation in outcomes related to specific objectives that an organisation is willing to withstand. It measures the degree of deviation from expected results that an organisation can absorb without significantly impacting its ability to achieve its goals.
Example: A manufacturing company might tolerate a 5% variation in production output due to supply chain disruptions, but only a 1% variation in product quality.
Target Risk Profile
A target risk profile outlines the desired level of risk that an organisation aims to maintain in alignment with its strategic objectives, risk appetite, and risk capacity. It serves as a benchmark for decision-making and risk management practices, ensuring that the organisation's risk exposure is consistent with its goals and capabilities.
Example: A technology company defines its target risk profile by setting a moderate risk appetite for innovation projects, recognising the high potential for rewards but also the inherent uncertainties.
Risk Identification and Assessment
Risk identification and assessment are the foundational processes in risk management that involve recognising potential risks that could impact the organisation and evaluating their significance. These steps are critical for developing effective strategies to manage and mitigate risks.
Example: A healthcare provider conducts a risk identification session with its management team and frontline staff to identify potential risks such as data breaches, equipment failures, and regulatory changes. Using a combination of brainstorming, checklists, and expert interviews, they compile a comprehensive list of risks.
Risk Appetite
Risk appetite refers to the level of risk that an organisation is willing to accept in pursuit of its objectives. It represents the threshold of residual risk that is deemed acceptable by the organisation’s leadership, reflecting their willingness to take on risk in various areas of operations and strategic initiatives.
Example: A financial institution may have a low-risk appetite for credit risks but a higher-risk appetite for market expansion opportunities.
Risk Capacity
Risk capacity refers to the maximum level of risk that an organisation can absorb without jeopardising its ability to achieve its strategic objectives or maintain its financial stability. It represents the organisation's actual ability to endure potential losses or adverse outcomes based on its financial resources, operational capabilities, and overall resilience.
Example: Example: A company may have a high risk appetite for investing in new technologies, but its current financial situation and cash flow constraints may limit its risk capacity. Despite its willingness to take on high risk, the company must ensure that its investments do not exceed its ability to manage losses.
Approaches and Methods
Approaches and methods in risk management refer to the strategies and techniques that an organization uses to identify, assess, manage, and monitor risks. These approaches provide a structured way to handle risk and ensure that the organisation’s risk management efforts are effective and consistent.
Example: To manage financial risks, an organisation might use a combination of risk reduction strategies, such as implementing stronger internal controls, and risk transfer methods, such as purchasing insurance. They might also employ qualitative methods like expert interviews and quantitative methods like Monte Carlo simulations to assess these risks comprehensively.
Risk Monitoring and Control
Risk monitoring and control are ongoing processes in risk management that involve tracking identified risks, evaluating the effectiveness of risk mitigation measures, and ensuring that risk management strategies remain relevant over time. These processes are essential for maintaining an organisation's resilience and ability to adapt to changing risk environments.
Example: A financial services company monitors its credit risk by using key risk indicators such as the percentage of overdue loans and changes in credit scores. The company conducts regular internal audits to ensure compliance with risk management policies. The company takes corrective actions, such as tightening credit approval processes and increasing monitoring of high-risk accounts, if it detects an increase in overdue loans. Periodic reviews evaluate the effectiveness of these controls and make necessary adjustments based on performance data and emerging risk trends.
Example
A technology company defines its target risk profile by setting a moderate risk appetite for innovation projects, recognising both the high potential for rewards and the inherent uncertainties. Financial reserves and operational capabilities determine the company's risk capacity, ensuring its ability to withstand potential failures. The company establishes risk tolerance levels for project timelines and budget deviations. The company categorises its risks into operational (e.g., system failures), financial (e.g., cost overruns), and strategic (e.g., market competition). The company specifies preferred mitigation strategies, like investing in robust project management tools and maintaining a diversified product portfolio. This target risk profile guides the company's decision-making and risk management practices, ensuring alignment with its strategic goals and capabilities.
Aevitium LTD Strategic Risk Management
Case Studies & Insights
What is Risk Mitigation?
Risk mitigation is the systematic process of identifying, assessing, and implementing measures to reduce the potential impact or likelihood of risks to an organisation's operations, assets, or objectives. Developing and applying strategies to manage risks to an acceptable level ensures the minimisation or prevention of negative effects on the organisation.
📊 Metric Toolkit: Linking Mitigation to Performance
Effective risk mitigation is not just about reducing exposure — it must also demonstrate its impact on performance. Boards and executives increasingly expect risk-adjusted metrics to show how mitigation decisions support both resilience and value creation.
RAROC (Risk-Adjusted Return on Capital): Measures the profitability of an activity after adjusting for the capital required to cover its risk. Helps management decide whether a mitigation strategy (e.g., hedging, tighter credit controls) improves overall returns relative to capital at risk.
RoRC (Return on Risk Capital): Focuses on how effectively risk capital is deployed, showing whether scarce capital is being used for activities that deliver the best balance of return and resilience.
👉 Practical takeaway: Use RAROC and RoRC alongside traditional KPIs to show the link between risk mitigation decisions and financial performance.
🔍 Audit Trail Example: Validating Dashboards and KRIs
A dashboard is only as strong as the data behind it. Supervisors and boards want evidence that Key Risk Indicators (KRIs) and mitigation metrics are reliable and independently validated.
Example:A global asset manager tracks liquidity risk through KRIs such as daily outflow ratios and fund redemption concentrations. To ensure these metrics are decision-useful:
1) The Risk team cross-checks KRI inputs against independent data sources.
2) Internal Audit periodically reviews the dashboard build, ensuring thresholds, data lineage, and reporting logic are accurate.
3) Results are reported back to the Audit and Risk Committee, creating a full evidence trail that mitigation actions (e.g., funding contingency plans) are based on validated information.
👉 Practical takeaway: A robust audit trail transforms dashboards from management tools into credible governance evidence, strengthening both board oversight and regulatory confidence.
Build Practical Skills in Risk Strategy & ICAAP/SREP
What are the Five Risk Strategies?
Having a well-defined risk strategy is crucial for effectively managing and mitigating potential threats to your organisation. To comprehensively handle risks, organisations can implement five key risk strategies.
1
Risk Avoidance
This strategy entails taking steps to eliminate a risk altogether by not engaging in the activities that lead to it. For example, a company decides not to enter a market with high political instability to avoid potential losses from sudden regulatory changes.
2
Risk Reduction
This strategy focuses on mitigating the impact or likelihood of a risk occurring by implementing measures that reduce its effects. Implementing cybersecurity measures, for instance, can lower the risk of data breaches.
3
Risk Transfer
This strategy involves transferring the risk to a third party, typically through insurance or outsourcing. For example, purchasing insurance to cover potential losses from natural disasters or outsourcing IT services to manage risks associated with technological failures.
4
Risk Acceptance
This strategy is about recognising the risk and choosing to accept it without taking any action to prevent or mitigate it, usually because the cost of mitigation is higher than the risk itself. For example, a small business might accept the risk of minor equipment failures because the cost of insuring or replacing equipment is manageable.
5
Risk Sharing
This strategy involves distributing the risk among multiple parties, often through partnerships, joint ventures, or contracts. For example, a construction company enters into a joint venture with another firm to share the risks and rewards of a large infrastructure project.
Example 2:
Balancing Market Expansion and Capital Capacity
A mid-sized retail bank is planning to expand into new international markets to capture growth opportunities. The strategy involves launching digital banking services and opening new branches in two regions.
***
Strategic Ambition: Increase market share by 15% over three years.
Risk Appetite: Willingness to accept higher operational and compliance risk
to achieve faster market entry.
Risk Capacity: Current capital buffers are only 2% above regulatory minimums,
and liquidity is already stretched due to recent investments.
***
Trade-Off:
The board, advised by the CRO, recognises that while the risk appetite supports expansion, the actual capacity is insufficient to absorb potential losses from regulatory fines, cyber incidents, or slower-than-expected customer adoption.
***
Decision:
The bank phases the expansion over five years instead of three, ties market entry to maintaining a capital buffer 4% above the minimum, and requires quarterly stress tests to check liquidity under different scenarios.
***
Lesson:
An effective risk strategy balances ambition with resilience. Appetite alone cannot drive growth if capital and liquidity capacity do not support it.
What are the Four T's of Risk Management Strategy?
Building on the five risk strategies we discussed earlier, the Four T's of Risk Management Strategy are:
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Tolerate (Accept): Accept the risk without action when it is within acceptable levels.
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Treat (Mitigate): Implement measures to reduce the likelihood or impact of the risk.
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Transfer: Shift the risk to a third party via insurance, outsourcing, or contracts.
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Terminate (Avoid): Eliminate the risk by discontinuing the activities that generate it.