Insurers could do more to exploit scenario analysis, Swiss re study says

Insurers are increasingly using scenario analysis to evaluate multiple risks, but the industry could do more to fully exploit state-of-the-art approaches, Swiss Re’s new sigma study says.
Scenario analysis helps insurers make business decisions by considering a number of potential future developments, allowing them to manage a broad range of interrelated risks.
Unlike stress testing, which can be used to measure the financial impact of a large change in any single given factor (or a set of tightly-related factors), scenario testing “involves simultaneous changes to a wider range of parameters and/or risk factors,” Swiss Re notes.
For example, Swiss Re discusses how insurers might evaluate a complex scenario like a pandemic.
“Medical experts are needed to understand how pandemics spread and to help determine infection, mortality and morbidity rates,” the sigma study notes. “Economists are needed to assess the impact on different parts of the economy and capital markets.
“Underwriters are needed to gauge the costs to various insurance lines.”
When the analysis is finished, insurers can review whether additional reinsurance is required, whether more restrictions should be imposed on business interruption coverage and even how a pandemic might affect asset returns (thus allowing insurers to discuss a means for quickly de-risking a portfolio).
Swiss Re notes state-of-the-art scenario approaches would include:
•    A global model of assets and liabilities that can be stress tested using insurance, economic and financial market shocks.
•    A regular program of internal scenario tests related to shocks such as natural catastrophes and pandemics, as well as economic and financial shocks.
•    Models that capture how these shocks would affect each major asset class and business line.