In a world in which once-in-a-100-year events seem to occur every few years, scenario analysis, which uses a systematic approach to anticipate a broad range of possible future outcomes, provides valuable insights. Scenario analysis facilitates business decisions by taking into account a number of potential developments and possible future events in business environments. Most insurers use scenario analysis for strategy development and risk management.
Scenario analysis is particularly important for insurers, as their survival depends on their abilities to gauge and appropriately price risk. To manage the broad range of risks they face — many of which are interrelated — insurers often develop scenarios for risk management, underwriting and pricing decisions, strategic planning, and capital management.
Scenario analysis enables insurers to develop mitigation strategies and contingency plans for such events. Ultimately, the use of scenario analysis can help insurers to avoid making poor decisions and to identify growth opportunities that could increase the return on equity and reduce income volatility.
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