Assessing how scenarios help evaluate risk and opportunity

Published on Thu, 23/09/2021 - 13:46
Julian Kirkman-Page, Russell Group
Julian Kirkman-Page, Russell Group

Scenario planning helps decision-makers identify outcomes and impacts, evaluate responses and manage risks and opportunities, writes Russel Group’s Julian Kirkman.

The (re)insurance market has for a long time been familiar with the concept of creating scenarios to quantify potential losses in the event of certain types of catastrophes, accidents, or disruptive human interventions. Lloyd’s of London, for example, has its Realistic Disaster Scenarios (RDS). 

Increasingly in the corporate world, scenario planning helps decision-makers identify outcomes and impacts, evaluate responses and manage risks and opportunities. By imagining these potential risks and opportunities, Russell Group believes it is possible to create processes that allow businesses to become proactive rather than simply responding to events and has been discussing these days with its working group of senior risk management execs, as we discuss in this article.

The event scenarios are regularly reviewed to ensure they represent material catastrophe risks. In recent years the range of Lloyd’s scenarios has broadened to include more than NatCat events, and now comprises more specialty lines such as onshore/offshore energy, aviation, cyber and other types of events.

Scenarios Help Evaluate Risk and Opportunity

The COVID-19 pandemic and increasingly new emerging risks in cyber are magnifying the value of scenario planning. For corporates, scenario planning is a way to have a better understanding of an uncertain world by identifying assumptions about the future to determine how an organization can respond better.

By bringing leaders in the world of insurance, reinsurance, risk modelling and business together to think through what scenarios could affect your business, Russell believes we can make businesses more viable in the long term and help free them up to focus on building a more creative, profitable business at the same time.

Russell Group’s working group of senior risk managers and thought leadership research which has had deep engagement with insurance and corporate business leaders, suggests a new approach to increasing business risk complexity is required. This approach establishes a set of scenarios which would test the viability of a corporate to a combination of such scenarios in a typical year.  The intention of these viability scenarios is to stress test the corporate’s cash position and generate the data to enable insurer’s to develop solutions for these scenarios.

Scenario Planning Trumps Risk and Compliance

Scenario planning, agile business strategies, a focus on long-term vision, better and improved risk management and more frequent and impactful responses to market disruptions are essential to continued business success. According to a recent EY Global Board Risk Survey. the key findings are that modern enterprise risk management needs a long-term perspective, aligning risk management priorities with business strategies and focusing on emerging risks.

The report acknowledged that the COVID-19 pandemic has played a part in accelerating the risk landscape into new unchartered territories, adding: “COVID-19 is not only a major risk event in itself – it is also an accelerator of risks that were already omnipresent: cybersecurity attacks, supply chain disruption, geopolitical tension and other external threats.”

Seven out of 10 boards say that they will be investing in new technology to address their risk management needs in the next 12 months. Likewise, boards want risk reporting that is predictive, focusing on emerging and atypical threats, and built on a combination of external and internal data. Only 20% of boards believe that their organisations are effective at disaster response planning and understand the interconnectedness of their risks.

It seems that organisations want to broaden their thinking and consider more longer-term trends that may benefit or harm their organisations. Board members want to spend more time on strategy and scenario planning and less time on risk and compliance.

The solution?

The complexity of business relationships means that trading risk is becoming more interconnected. Understanding this is key to sustainable and successful operations. Risk managers need financial solutions which protect the business against tail risks, regardless of the cause. Insurers sell financial solutions that protect for defined causes. This creates a coverage gap of what is not protected. A resilience solution that combines insight, analysis and action will be part of this coverage gap.

We will be making our annual pilgrimage to a, hopefully, COVID-lite Airmic this year in Brighton so we are looking forward to sharing our deeper working group insights with the rest of the insurance and risk management community.

It would be great to get a steer from Airmic members so please email me so that we can all take the conversation on connected risk to a more meaningful level.

Julian Kirkman-Page is responsible for managing Russell’s sales team and for running Russell’s corporate work group of risk managers from FTSE 100 companies. To find out more about Russell’s approach, please visit