1.3 Report Rationale and Intended Audience

This report intends to outline best practices for scenario analysis within the insurance community, and to provide a practical framework to assist practitioners engaging with shock scenario development.

Within the report, we explore key features of, and commonalities and differences between, insurance specific scenarios, and suggest how and for whom they can be used effectively. Due to the varied applications of scenarios and their associated development methodologies, we focus the methodology discussion on shock risk scenarios, and draw commonalities from various shock scenario development techniques. As a variety of scenario use cases have unique requirements and maturity in the practice, development methodologies do vary. However, we propose that there is a general process which can be adapted and modified for these various uses. By providing key criteria and considerations for scenarios in the form of a scenario development framework, we hope to equip the reader with the necessary tools and context to develop coherent, comprehensive, and intelligible scenarios, which therefore effectively fulfil their intended purpose. This report provides insurance-specific recommendations for scenario development, and has been published in parallel with another report2 which similarly outlines best practices for scenario development in the disaster risk reduction community. The insurance industry has a rich expertise in risk assessment tools to price risk, employing scenarios that tend to be expert-driven, scientifically supported, and product oriented. In contrast, within the diverse community of disaster risk managers, scenarios often serve to explore and incorporate the culture and experience of various stakeholders in a more participatory approach, for which emphasis may be placed as much on what is learnt in the scenario process as the end result. Developing the two reports in parallel has provided valuable insight into the merits of contrasting scenario approaches and has informed the best practices advocated in both. Report Aims

This report aims to address scenario best practices through the following considerations:

1 The role scenarios play within the insurance community;

2 The common and contrasting characteristics and typologies of scenarios;

3 How scenarios are currently employed and might be further or better used in methodologies to address emerging risks;

4 Current scenario limitations and critiques specific to the insurance community;

5 Stress test scenario guidance for catastrophe risk analysis;

6 How scenario development and applications might adapt in the future.