Scenario Analysis

Instead of asking only how likely a risk is, the team builds a story. It defines the event, the chain of effects and the time frame, then estimates losses and responses. Scenarios are often described as severe but plausible: extreme enough to challenge the organisation, yet credible enough to take seriously. They may draw on past events elsewhere, expert workshops or industry data. In operational risk, scenarios fill gaps where there is little loss history, and their estimates can feed capital models. They also test business continuity and crisis plans. Scenario analysis differs from forecasting, since it does not claim the event will happen. Results rest on expert opinion, so assumptions are recorded and challenged. Management rehearses events that its data has never shown.

A water utility considers a scenario in which its main treatment plant is offline for five days. Teams estimate lost supply, customer compensation and lost income, and test whether crews can deliver tanker water to priority sites such as hospitals. The exercise shows the manual arrangements would cover only a third of demand.