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Sue Taylor, Claims Specialist at Miller Insurance Services LLP Scenario testing: flip the switch in your head

Who knows where the “Black Swan” will land? If this question could be answered, and the possibility or probability of a landing could be ruled out, then a lot would change. This would also include the requirements of insurance policies, since the extreme (outlier) risk would be largely removed.

The need for insurance or reinsurance arises for two main reasons: either a risk is actually detected in a review of a situation or there is a legal framework condition in place. The risk relates to an event or series of events that can result in normal business operations being hampered or even prevented. A Black Swan represents an extreme consequence of an event which goes far beyond the realms of normal expectations and experience. The explanations for such an incident are only provided afterwards – they make the event predictable in hindsight, but the probability of it happening still cannot be calculated using conventional methods.

Scenario testing allows us to think the unthinkable.

How can we prepare for a possible landing of a Black Swan? How can we imagine the unimaginable? Scenario testing for claims can certainly help. But what does such scenario testing involve, and where are its limits? It’s about testing how the plans and concepts, as well as the people involved with them, respond to an incident or a series of events. Scenario testing, however, is no master plan for the continuity of business activities or to restore them in the event of a disaster.

Scenario testing

No matter what happens: the show must go on!

It is impossible to perfectly prepare for a catastrophic event. It is possible, however, to play out and trial scenarios in order to better recognise the challenges involved and to overcome them more effectively than others. It’s like the job of an actor: they practice their role intensively before stepping into the footlights on the stage. Quite simply because they want to make the very best of their abilities and do not want to fear getting nervous, stumbling over or even forgetting their lines. They want to offer their audience the best possible experience. And yet in the middle of the performance, something unexpected can happen – but a well-prepared actor will ensure that the show goes on! At Miller, we don’t think it enough to just have an emergency plan and a pre-defined group of people made up of claims processors and experts for claims. We also need to see how everyone involved reacts to the emergency plan in place, and how the event develops subsequently. To ascertain this, we hold workshops with scenarios in which the task is to set out all of the events that have got out of control, based on any conceivable possibility and including elements from current claims. In the workshop, this scenario is presented to clients, insurers, claims processors, claims assessors, proven experts and in some cases even to the clients’ lawyers. This type of workshop is prepared professionally in order to ensure that the goals agreed in advance are reached.

Preparation gives you certainty

The impacts of the various elements in the scenario are then explored. Where a definitive answer is not possible, an agreement must nevertheless be reached that is acceptable to all parties and which can be integrated into an action plan. The point is that,

when reality hits, you cannot back out and say “it’s too difficult”. This is precisely one of the goals of scenario testing: to develop strategies that allow us to manage these difficult situations. Experience has shown that this approach really does pay dividends: clients who have completed scenario testing and who were later involved in a claim were able not only to build on the connections developed between all of the parties present, but they were also confident that their strategies could be called upon and implemented.

Scenario testing

The test also demonstrates how the insurance companies respond and what proofs the insured party needs to provide in order to involve the claims handling department in the process. Dialogue regarding what might be required in a range of cases leads to the insured parties being able to optimise their documentation, thereby providing the information they need to ensure faster claims processing in the future.

How are these scenarios developed? My personal approach is to first ask the client about their concerns, and to determine what they would class as a potentially catastrophic event. The views of one client might not necessarily be the same as another’s. Each client has their own assessment of risk, and at the end of the day, they have very different tolerances.

Playing scenarios through to the end

Once a primary event has been identified, research and technical expertise are needed to stage a potential sequence of events. One example scenario might be that a client fears being affected by an earthquake. In this case, the most serious earthquake in the region in question could be used as a basis and its magnitude ramped up a little further in the scenario. The radius of the aftershocks could also be checked and expanded – again, just a little. The infrastructure that the client uses in the area is then checked, and in the scenario it is damaged or destroyed – for example, even the way in which access is gained to the company’s premises. If there is a nuclear power plant nearby that might be affected, or if the area is within the zone of a potential tsunami, then these impacts also need to be taken into account. I then study research reports and check the design or other risk-reducing factors, such as whether the building meets modern earthquake standards. Earthquakes also frequently entail other consequences, such as fire, explosions, floods or looting – so as many consequences as possible need to be included in the scenario testing!

It gets worse: an inevitable event on top!

Scenario testingOne factor that I add to every scenario whenever I can is at least one further inevitable event. Why? This type of additional event makes processing a claim more difficult and prolonged. Many clients are unaware of how long it generally takes to process such a claim. It is not just days or weeks, but usually months. And often, they do not realise that they will not have access to their systems until this process is complete. Normally, I use my experience of handling such unavoidable events in order to add this factor to the scenario.

Notice the details, encourage imagination

I also read through the insurance documents thoroughly, specifically in the “grey areas”, for example in relation to the identification of causes, continuation clauses, mutual dependencies and the period of liability. Bearing in mind the provisions that are set out there or which equally might not be listed, I add to the scenario accordingly. The key is, in my opinion, that no scenario is fool-proof. This might make life harder for the brokers, insurers and claims assessors, but it benefits the insured parties. I then write down the scenario in a narrative form, not just in bullet points, so that I can communicate a sense of drama and hopelessness in order to encourage people’s imaginations.

Developing scenarios, improving options for action

The scenario and the supporting damage reports are provided to all of the participants as a continuation of the workshop so that detailed notes, comments or options for action can also be circulated and exchanged later on. Wherever possible, corrections relating to the potential options for action or decisions are made to the records produced during the workshop, for example a change to the claim record or in relation to the involvement of further experts beyond the envisaged scope.

Summary

It is probably not possible to prevent a highly unlikely event having an impact, or even a Black Swan landing.

It is possible, however, to develop strategies and build relationships that safeguard a certain degree of robustness and resilience so that the landing of a Black Swan will create as few waves as possible.

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