Scenario Analysis
1. Introduction
Scenario analysis is frequently recommended by Airmic as a tool for risk managers to aid their business in understanding its risk exposures, and support strategic planning. The objective of this guide is to present a simple framework for risk and insurance managers to lead scenario analysis within their business, and demonstrate how this framework can be used for a variety of different purposes.
In the simplest of terms scenario analysis is the exercise of considering unexpected events, occurrences and change by asking the questions ‘what might happen?’ and ‘what could we do?’ Scenario analysis is an important part of an organisation’s risk management system, which involves understanding the extreme but plausible events that can affect the business and their effect on its strategy, operations and financial health. Scenario analysis tests the efficiency of the controls already in place and highlights unexpected risks and opportunities.
As part of our research into best practice Airmic have worked with ORIC International, which has recently developed its ‘Scenario Universe’ resource. Its research into the scenario analysis activities ORIC International members perform identified the six key stages in undertaking scenario analysis, which it has shared with Airmic. Airmic has supplemented this framework to meet the specific needs of Airmic members and will describe each of the stages in turn before describing how the framework can be used to meet the specific needs of the business.
Scenario analysis can be used to test the operational, tactical and strategic plans and activity within the business, and how they fit together. This guide will consider the following three uses of scenario analysis:
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