Why Scenario Planning Matters in Risk Management
Risk Management is all about predicting future risk events and ensuring there is protection in place for those risks. To be successful at Risk Management, organizations need to have a way to foresee and plan for these events. This is where Scenario Planning comes into play. According to The Wall Street Journal, “scenario planning helps organizations perceive risks and opportunities more broadly, to imagine potential futures and different scenarios that might challenge their assumptions, and to spot sources of risk that may otherwise go undetected.”
Now that you understand the basics of what scenario planning helps organizations do, we are going to talk about the obstacles it solves, what outcomes mean, and why it is so effective.
What are Theoretical Risks?
If there was no need to predict theoretical risks for your organization, you would not need Risk Management. This is one of the most important aspects of scenario planning.
A Theoretical Risk is something that could happen, but there is no evidence of this ever happening in the past.
By using scenario planning to look for future risks and determining how to handle them, you are preparing your organization for the future when and if these risks occur. We all know the world is unpredictable, so scenario planning is helpful for getting your team to think outside the box.
You can use scenario planning to create mock risk events and allow your team to react to them. After the exercise is over, you and your team can sit down and talk about where they did well and where they need to improve.
What Obstacles are Solved by Scenario Planning?
After meeting with your team, it is important to take it one step further. If you do not go further than identifying risks, there will be obstacles you have to overcome later. Scenario planning helps organizations overcome many of these obstacles before the risk event occurs. Here are some examples:
- Assumptions about the impact of a risk occurring.
- Discomfort from uncertainty.
- Failure to identify and define responses and outcomes.
- How to strengthen the chance of success.
By using scenario planning, organizations look at past data and produce new situations where risks may occur. These simulated situations help the organization make better decisions when risk turns up in the actual world.
What do Scenario Outcomes Mean?
When an organization completes a scenario, they can look at the results and determine courses of action to take next time and tools used to help mitigate that risk.
By engaging in scenario planning, organizations can test the effectiveness of their risk management plan and adjust where needed. Sometimes a test may determine part of the risk management plan is ineffective, and you will have to reconfigure it before a real risk occurs. This is especially important in high-risk industries with the potential for large losses.
The outcome of a scenario planning test can also help employers and management get more comfortable with risk and actual risk situations. By practicing what procedures to follow in a risk situation, employees will be better prepared to handle risk when it occurs.
Why is Scenario Planning so Effective?
Scenario Planning is extremely effective because of its ability to put organizations in a situation where they are dealing with risk, not just planning for it. By putting an organization in a simulated risk situation, employees can look at the entire risk and how different elements relate. This is different from planning, which takes a narrower view and looks at each aspect individually.
Scenario planning also helps organizations recognize warning signs. With planning, an organization begins at the point where the risk has already happened, and action has begun to resolve the problem. Scenario planning starts at the very beginning. A risk occurs, and you must determine what happened to figure out where to start.
Predictive analytics also help with scenario planning. Using historical data to predict future outcomes of new risk events helps organizations obtain more accurate results when running these tests.
A Tool You Need in Every Scenario
In every risk situation, no matter the cause, you need insurance to mitigate the risk. This means you need to know what policies you have, what third parties you work with have, what is about to expire, and who is in compliance. This is a lot to keep track of, so the most successful Risk Management Plans incorporate certificate tracking software to help. To learn more about Certificate of Insurance (COI) tracking software and how you can implement this into your Risk Management Plan, schedule a free SmartCompliance product demo here!