Credit Risk

Credit risk is the economic loss suffered due to the default of a borrower or counterparty. [Source: Society of Actuaries (SOA) Enterprise Risk Management Specialty Guide]

In a general sense, it is the risk that a counterparty to an agreement will be unable or unwilling to make the payments required under that agreement. Some organisations define credit risk more narrowly as the risk that a borrower will partially or wholly default on repayment of debt (interest and/or capital payments). The phrase 'credit risk' is also sometimes used to include risks relating to variations in credit spreads in the market. [Source: Institute and Faculty of Actuaries (IFoA) Enterprise Risk Management Specialist Principles (SP9) Core Reading]

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Market Risk

Market risk encompasses risk arising from changes in investment market values or other features correlated with investment markets, such as interest and inflation rates. This would include the consequence of investment market value changes on liabilities , and may also include the consequence of mismatching asset and liability cash flows.

However, some commentators and non-financial companies may use the term 'market risk' to refer to the risk of lower sales or profit margins resulting from changes in market conditions, where 'market' is interpreted as the market into which the products or services of that entity are sold. [Source: Institute and Faculty of Actuaries (IFoA) Enterprise Risk Management Specialist Principles (SP9) Core Reading]

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Risk Appetite

Risk appetite can be interpreted as reflecting the setting of targets and limits across the organisation as a whole, plus the breakdown of these high-level statements into more detailed risk tolerances. [Source: Institute and Faculty of Actuaries (IFoA) Enterprise Risk Management Specialist Principles (SP9) Core Reading]

It is the level of aggregate risk that a company can undertake and successfully manage over an extended period of time (Tavan). The capacity for undertaking risk will vary by company and depend on circumstances unique to the company. To determine its capacity, a company will need to initially establish a set of corporate objectives, e.g., minimum surplus ratio, industry rating. Ultimately, a company will need to develop corresponding risk-management strategies to successfully manage its risks. [Source: Society of Actuaries (SOA) Enterprise Risk Management Specialty Guide]

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