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Aon Global Risk Consulting |

Scenario AnalysisApplications to Risk & InsuranceAIRMIC, Harrogate

June 2016Eddie McLaughlin , Chief Commercial Officer

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Aon Global Risk Consulting

Outline

• Background – Airmic scenario analysis process

• Scenario analysis for Risk & Insurance related themes

• SP1 – Refinements for Strategic Risk Assessment

• SP2 – Refinements for Crisis Management

• SP3 – Refinements for Insurance policy stress testing (claims scenario testing)

• Summary and conclusions

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Background – Airmic scenario analysis process

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Assessment & modelling (scenarios & impacts)

Reporting, communications and review

� Appoint risk owners – ensure accountability� Create action plans -set timescales and monitor� Stakeholder communication� Review and document process

� Ensure an appropriate ‘system’ of risk controls are in place.� Confirm risk controls are complete for future scenarios and will work

as intended.� Identify potential gaps / improvements

� Develop threat scenarios via ‘riskstorming’ workshops, interviews, � Identify credible scenarios.� Identify potential basic causation factors (leading indicators and

signposts or Key Risk Indicators).� Qualify potential impacts (e.g., revenue, BI, people, reputation)

� Form Multi-disciplined group from within the organisation, key stakeholders, and technical specialists.

� Define “system / risk” to be analysed.Definition & planning

Validation & mitigation

Scenario analysis – Risk & Insurance themes (subset)


Claims Scenario Testing PropositionNovember 2015

SP1 - Strategic Risk Assessment

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Scenario analysis – Refinements for: Strategic Risk Assessment



SP2- Crisis management

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Scenario analysis – Refinements for: Crisis Management

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Live Scenario testing: Phase 1- Breaking News- 7 am

Breaking news- Fire breaks out at the UK regional Distribution Centre of a leading

European retailer

Emergency Services at the scene

Battling to get the fire under control Suspected cas ualties Unknown number of casualties on way to hospital.

Fire started at 8 am and is still raging

Will Retailer be able to fulfil its Christmas orders?

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Phase 2- Local BBC Radio Station Lunchtime

Fire at the regional distribution centre of leading retailer is now out

Two people in a serious but stable condition in hospital. One person is in a

critical condition.

Serious blow for Retailer and for the local community. 250 jobs at regional

distribution centre at stake

It’s a race against the Christmas clock for Retailer.

How will Retailer fulfil their Christmas orders?

How will the fire affect local jobs? Will people be laid off?

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Phase 3- BBC News Webpage- 2 days later

After dropping 20% in 2 days, shares in Retailer recovered some ground closing at 26p, 5% up on pre

incident price in early trade this morning.

News comes after Retailer announced that all orders for Christmas would be fulfilled and that the distribu tion

centre would be operational again within weeks.

But the breakthrough does not mean that Retailer’s problems are over. Dave Shepherd, Chief exec said

‘The immediate crisis has been averted and it’s a g reat relief that we can get orders out in time for Chris tmas but, we are still recovering parts of our business and that process will continue for some weeks to come. ’

Stock dropped below 18p at one stage yesterday. It’ s lowest point since flotation but has recovered to 2 6p

amid signs that it is tackling its crisis well.



SP3 - Claims Scenario Testing

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Pre-Loss Claims Scenario Framework

Stages

Key Objective(s) of module…

� Understanding of existing mitigation Plans

� Understanding your priorities – classes, scenarios

� Identify where you will seek assistance from insurer

A

� Understand and agree individual elements of policy cover

� Understand and agree intent - of policy wording/cover)

� Ensure appropriate clauses/cover are in place (to meet requirements)

B

� Understand and agree process of loss notification

� Understand and agree ‘Project Managed’ approach to notified loss

� Understand and agree your priorities when loss occurs

� Understand and agree the ‘tools’ to be used (& benefits) to ‘project manage’ the loss

C

� Understand and agree the potential financial impact of a loss (to you or a related third party)

� Understand and agree process to establish quantum for insurance purposes

D

BPolicy

Wording

DAssessing Financial Impact

AObjectives & current state

CSpecific Loss

Response

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Potential Roles and Responsibilities

� Co-design & facilitation of exercise

� Subject matter experts (agreed during design phase e.g. claims & Broking) in attendance at exercise

� Development of output/actions arising from exercise

� Documentation (& tracking) of exercise output / actions

Aon / Broker

� Selection of module(s) to form basis of the exercise

� Co-design of exercise� Subject matter experts

(agreed during design phase e.g. Risk Manager, Operations Manager, Legal, Treasury) in attendance at exercise


Client

� Co-design of exercise� Attendance at exercise� Development of

output/actions arising from exercise

Insurer

� To potentially include other party(ies) that would be involved in handling the scenario being discussed in the scenario (e.g. Loss Adjuster, Reinsurer)

� Attendance at exercise (Optional)


Other Experts

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Claims Scenario analysis: Focus of exercise

Timeline plotted from day 0 of loss to final settle ment

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Discovery and documentation of every potential cost impact arising, how and when the cost impact will arise, how it will develop and the priority in terms of resolution of those impacts

Clear articulation of how and where the policy will respond to each cost impact, identification of any potential gaps and identification of opportunities to mitigate cost impacts through a potential risk engineering response

Detailed articulation of the ‘proofs’ required for the

quantification of each cost impact

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Scenario analysis – Refinements for: Claims scenario testing (FS example)

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Scenario analysis – Refinements for: Claims scenario testing (example)

4. Employee Legislation - law suit

Catastrophe > $100m 5 Very High

Major $50m - $100m 4

IRRHigh

Moderate $25m - $50m 3

IRR - insMedium

Minor $10m - 25m 2 Low

Insignificant < $10m 1

RRR

RRR - Ins

1 2 3 4 5Rare Unlikely Probable Likely Almost Certain

Less than every 10 years +

Every 5-10 Years

Every 2-5 years

Every 1-2 years

Once or more per year

1 2 3 4 5

Substantial:75-100%

1 No insurance cover 0%

2 Limited insurance cover 1 - 25%

3 Partial insurance cover 25 - 50%

4 Moderate insurance cover 50 - 75%

5 Substantial insurance cover 75 – 100%

Note: IRR – Inherent Risk Ranking; RRR – Residual Risk Ranking (- Ins: with insurance)



Summary & conclusions

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Integrated process – Scenario development and insurability

Kick off:review third party cyber risk project

Cyber Scenario Analysis : define the current cyber risk scenarios

Financial Modelling:develop model to determine financial exposures

Insurability Analysis : alignment insurable risk exposures with the current insurance strategy

Create coverage specifications via Priority Matrix (Client/Aon collaboration

Primary & excess insurer market submission presentation involving key stakeholders

Negotiation period –primary & excess Time will depend upon complexity of risk and size of the tower sought

New cyber programme incepts

2. Cyber Financial Modelling1. Mining Cyber Databases: Data analytics across Aon claims data,

proprietary data, and open source intelligence of cyber-related incidents to build an appropriate financial model

2. Financial exposure model: Advanced financial modelling to quantify the 1st and 3rd party costs of each identified cyber risk scenario:

• Crisis Expense (IT forensics and notification costs)

• Extra Expense (BCM/DR/ICOW)

• Loss of Income (Revenue exposure)

• Defence Costs (Legal defence costs)

• Regulatory Fines (Data breach penalties)

• Liability (3rd party damages)

3. Cost Benefit Analysis (CBA) Model: Input toward further investment in the level of cyber resilience

Cyber risk advisory process

Cyber risk broking process

2-4 weeks

2-4 weeks

2 weeks

1. Cyber Scenario Analysis1. Identify critical information assets: Working with IT teams to identify

and map business critical information assets

2. Agree relevant cyber scenarios : Agree priority cyber risk scenarios for financial analysis

3. Analyse cyber triggers and consequences : Work with IT to define the triggers and impact of agreed cyber scenarios.

4. Define commercial impacts: Define commercial implications arising from the identified cyber risk scenarios. Involving interviews with legal, financial, technology, and operations representatives to define the worst case (Estimated Maximum Loss) and more mitigated losses (Probable Maximum Loss)

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2

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Summary

• Scenario Analysis is a ‘must’ in the Risk Managers toolbox

• Focus areas:• Strategic Risk Assessment (Thematic review, deep dive)• Crisis Management• Claims scenario testing • Other e.g. strategic planning, product development etc

• All scenario analysis’ are not the same – apply refinements to standard process• Definition & planning• Assessment & modelling• Validation & mitigation• Reporting, communications and review

• There are volumes of literature (and people!) to help ensure the process is a success

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Copyright 2016 Aon UK Limited.

Registered office The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London, EC3V 4AN

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder.

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Contact details

Eddie McLaughlinChief Commercial [email protected] – 020 7086 3371Mob – 07920 297976

Documents

Scenario analysis airmic1 - Health | · PDF fileBattling to get the fire under control Suspected casualties ... ‘The immediate crisis has been averted and it’s a great ... Scenario