I'm studying for the CCSP exam and I'm a little confused on the difference between "Risk Appetite" and "Risk Tolerance". Is there a clear and discernible difference? Can the terms be used interchangeably?
To me, both terms are referring to the amount of risk that an organization (or more accurately, the governance and risk management program at an organization) is willing to take.
The best way to distinguish the two can be using mathematics. Risk Appetite is the target level of loss exposure that the organization views as acceptable, given business objectives and resources. Think of this as amount of money an organization can afford to lose (Eg - 10k $). Risk Tolerance is the degree of variance from the organization’s risk appetite that the organization is willing to tolerate. Think of this as how much percentage of the intended loss budget can be covered, or how much flexible is the loss budget. (Eg - 5%)
Now look at the examples - the company has a risk appetite of 10k $. This implies that the company can afford to lose 10k if there is a breach, breakdown or any issue. Risk Tolerance is how much this number can vary - implying that the 5% shown tells us that the Max limit the company can push it loss budget is (10k + (5% of 10k)) which is (10k + 500)$. Here, 10k is appetite and 500 is tolerance.
Risk appetite is general (organizational level) level of risk acceptance your organization pursue, in other words It’s an amount or type of risks the organizations decided to live with. Risk appetite could vary depends on several factors including industry vertical, competition, brand reputational value, culture at company, strength of the company in terms of financial stability.
Risk tolerance is defined at more granular level and mostly affects individual risks. Concept of applying these two parameters could be similar but they operate in different levels.
There are different perceptions around these terms. Please refer ‘ISO 31000:2018 Risk Management standard’ for widely accepted definitions.
