Scenario Best Practices: Developing Scenarios for the Insurance Industry
1.4 A Framework for Scenario Development Within this report, we propose a framework for scenario development that defines eight core steps, outlined in Figure 1 and discussed in further detail in Section 4. This framework is intended as a point of reference to assist and ensure efficacy in the scenario process, rather than as a prescriptive method that must be followed
absolutely. Further, while it outlines a linear step-by-step structure for clarity, we encourage the scenario process to be an iterative one, in which stakeholder engagement provides opportunities for review and revision to ensure it succeeds in fulfilling its aims.
Step 1
Scope the Risk
Step 5
Identify the risk to be addressed, or, if the risk is uncertain or unknown, define the issues or vulnerabilities that the scenario exercise aims to expose. In the latter case, the risk may be identified later in the process. This contextualises the objectives and resultant decisions of the analysis.
Step 2
Conduct Background Research
Expand the selected scenarios with descriptions that are interesting, challenging, and plausible for all stakeholders. Account for all dimensions of a future event, including context, triggers, timelines, geography, responses, and implications.
Step 6
Research the topic defined in Step 1 by consulting relevant sources of (scientific) knowledge and all associated stakeholders within and beyond the insurance industry. If possible, consider each dimension of risk: hazard, exposure, and vulnerability, to recognise how and where impacts occur.
Step 3
Frame the Scenario(s)
Step 4
Develop Candidate Scenarios Compose a series of candidate scenarios that capture a range of plausible futures. Summarise scenarios with brief outlines and key variables, and explore contrasting characteristics. Select scenarios to progress that will challenge and achieve the desired objectives.
Assess Impacts and Materiality Assess the impacts within the insurance industry and in wider macro systems. Consider complexities and interconnectivities that may cause cascading impacts beyond the expected. Define what constitutes a material impact in order to focus the analysis on materially affected assets and areas of business.
Step 7
Consider and define the key aims, benefits, and characteristics of a scenario and its process. Figure 2 outlines some of the key questions the developer should ask when framing their scenario. Sections 2 and 3 provide the context to inform these considerations.
Develop a Narrative
Communicate and Act Communicate the key findings to stakeholders via meaningful qualitative and quantitative outputs. The content and complexity should be tailored to the audience. Include a clear indication of the extent to which the results can be relied on to inform decisions and actions to address the risk.
Step 8
Evaluate and Update Evaluate whether the objectives of the exercise have been achieved and iterate the process with stakeholder input to ensure or enhance efficacy. Be aware that the possibility and character of a scenario will change as controlling factors evolve, as will its impact as the industry advances, and so it should be updated to maintain relevance and utility.
Figure 1: Scenario development framework for the insurance industry
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