How scenario analysis goes to the heart of risk management

The decision to produce Airmic’s guide to scenario analysis – and support it with a member-only seminar at the annual conference reflects the growing professionalisation of risk management in general and commercial insurance in particular.

“Put simply, scenario analysis is an exercise conducted to consider the questions ‘what might happen and what would we do?’ It can help to highlight risks and opportunities in the short and long term and used to test the effectiveness and efficiency of the relevant controls in place,” says technical director and deputy CEO Julia Graham. “However, scenario analysis is not a stand-alone activity, and it should form part of the organisation’s overall risk management system.”

The guide describes the common steps in scenario analysis – before looking at how it can be used for various different purposes: crisis management; insurance stress testing; strategic planning; and testing of the business model.

Scenario analysis is most often used by Airmic members as a way of ensuring effective and reliable insurance policies. It typically involves sitting down with brokers, underwriters, lawyers, adjusters and others to talk through how a policy would respond to different circumstances. If for any reason the proposed terms are found to be lacking, they can be adjusted pre-inception. Such exercises are, however, time-consuming. To be successful, they need to be approached in a structured way.

The Insurance Act, which comes into force in August, will make scenario analysis even more important and valuable as a tool when purchasing or renewing  policies, a point that is well demonstrated in the guide. However, the guide also illustrates how it can be used in business continuity management and horizon scanning and principal risk assessment. The message is that scenario analysis can help shape an organisation’s whole approach towards risk

The guide takes the reader through all the necessary steps and pitfalls, and provides check lists to help ensure that all bases are covered. Whilst every organisation is different, the document sets out the principles and approach that apply regardless of the specific circumstances.

“Whilst the Insurance Act gives Airmic members greater certainty that legitimate claims will be paid, it also makes it imperative for buyers to get their policy wordings 100% right so that they are legally fire-proof or else face potential disappointment,” says research and development manager Georgina Wainwright. 

“As well as making insurance more effective, scenario analysis helps to identify exposures and weaknesses within the organisation, supporting risk mitigation and wider risk management. In that sense it puts insurance purchase at the centre of good management and demonstrates how it can be strategically important to the whole organisation.”

Airmic has invested a great deal of time and thought into the question of how its members can achieve a higher profile and status within their own places of work. There is no one simple answer to that question – no silver bullet. However, scenario analysis conducted correctly will increase the reach and influence of the risk manager, putting him or her into contact with other senior colleagues. In the process it will help to demonstrate the importance of insurance and the value of the risk manager as a catalyst for better planning.