Bridging the gap between risk and insurance series
Scenario building and impact analysis is a crucial part of the risk management process, even more so with the spotlight being applied to scenarios and stress testing by the regulatory bodies. Risk Scenarios clearly communicate potential adverse events that could impact the business, detailing how, where, and why these events might occur, and their likely consequences. This information is essential for analysing how specific risks will affect the business in terms of response, business interruption, continuity and cost. It also helps indicate how insurance could respond, facilitating better risk transfer. However, a deep dive analysis of a specific risk is usually only fully explored for cyber risks, think black hat days/red flag days, whilst other high priority risks remain static and can lose their significance with outdated or broad scenarios.
Without understanding the frequency and severity of potential events, scenarios may fail to highlight critical risks. A well-developed scenario landscape leads to a better understanding of risks and allows for the assessment of mitigation strategies, including insurance. Missing out on identifying sources of risk can create gaps in your risk profile, reducing opportunities to minimize exposure.
In a constantly evolving business environment, including mergers, acquisitions, new geographies, and regulatory changes, how can you ensure your risk scenarios remain relevant?
01
Identify your operational risk scenarios utilising robust internal and external data to bridge any gaps. These risks should include:
02
Once key risk scenarios are identified, a workshop should be conducted with potentially impacted teams from across the business, these can and should include members of Risk, Legal, Regulatory, Technical, and IT. Participants should discuss the following as it relates to their function/department and be challenged by those in attendance:
03
All information should be documented and analysed in conjunction with external data. This analysis should provide:
| Loss Impact Type – Risk Scenario 1 | 1 in 100 Years (Worst case) | 1 in 50 Years | 1 in 10 Years (Moderate) |
|---|---|---|---|
| GBP £ Impact | GBP £ Impact | GBP £ Impact | |
| Financial: Loss of revenue | 15 million | 4 million | 1.5 million |
| Compensation to third parties | 10 million | 7 million; | 0.5 million |
| Regulatory fines | N/A | N/A | N/A |
| External legal fees | 10 million | 3 million | 0.5 million |
| External consultant costs | £24 million | £13 million | £1.0 million |
| Internal costs | 3 million | 3 million | 1 million |
| TOTAL | £62 million | £30 million | £4.5 million |
Our Scenario Development and Impact Workshops enable a deeper understanding of how each priority risk scenario will impact the business.
Scenario Workshop output enables organisations to:
For more information or to discuss how Scenario Development and Impact workshops can help you, contact the Operational Risk Solutions team at WTW.
