What risk drivers and impacts should you consider for pandemic scenarios?

Since the outbreak of the coronavirus (Covid-19), the ORX Scenarios community have been having regular discussions about the pandemic.

We've previously shared some of the key discussion points from our conversations about pandemic scenarios, and here are some more of the outcomes of the ORX Scenario Working Group calls. This time we've focused on the significant risk drivers and impacts that you should consider for pandemic scenarios.

Key risk drivers

Our conversations with scenario practitioners from around the globe have shown that there are a number of key risk drivers to consider for this type of scenario. These include:

• Senior leadership and key personnel absence – this can be influenced by factors such as contagion rate and mortality rate
• IT infrastructure and technology capacity – for example, can your VPN handle the demand and what is the potential impact of not being connected to the network?
• The increased volume of customer transactions and interactions – this includes the increased use of online services and call centre capacity

In addition to these drivers, it is important to think about public infrastructure, the number of customers affected, the number of operations that can no longer be performed and market volatility.

Main impacts of pandemics

The impacts of pandemic risk appear to be wide-ranging and are often linked to the length of the event. They range from the initial business disruption from operating in a different way to longer-term impacts, such as people. As well as this, there are effects on secondary risks, including increases in fraud, cyber and conduct. The impacts can be split into what could be thought of as 'direct impact' and 'indirect' or 'other impacts' – the other impacts are the additional consequences of a pandemic event.

Direct impacts

These are some of most significant direct impacts that we have discussed in our regular calls with ORX Scenario subscribers.

• Unplanned IT investment – this is is any cost incurred as a result of IT expenditure that was caused by the pandemic
• HR costs – this is wide-ranging and includes sick pay, additional employee benefits, training and hiring temporary staff and overtime
• Sanitisation costs where buildings have been cleaned due to staff testing positive for coronavirus
• Building expenditure
• Legal costs – there is the potential for firms to held liable if they didn't take appropriate measures to protect employees or on-site visitors

If you'd like what ORX is recommending their members count as losses directly due to the pandemic, please take a look at our recently published guidance on how to capture the operational risk impacts of coronavirus.

Other impacts

There are a number of additional impacts of pandemics that were identified in our discussions with subscribers to ORX Scenarios. Some of the key impacts mentioned were conduct risk, processing errors and business disruption. In addition, there is also fraud, loss of business, third-party and reputational risk to consider.

How is coronavirus impacting different business lines?

Our discussions also highlighted that different business lines are exposed to different kinds of impacts. Here's a brief overview of some of the main impacts of pandemics on the retail banking, investment banking and insurance business lines.

Retail banking

There were three impacts that stood out in our discussions to be especially aware of in the retail banking business line. One of which was regulatory penalties, which can be linked to customer treatment and suspicious transaction reporting. The second was loss of productivity, particularly for branch operations with high levels of manual processing, where opening hours are reduced and branches are closed and where some products may not be offered when employees are working remotely.

The other key impact noted was the effect on call centre capacity, with coronavirus resulting in an increase in call centre operations and therefore a need for an increase in call centre staff.

Investment banking

In the investment banking business line, the focus was on transaction errors, critical vendor failures – for example risk analysis or hedge booking systems being unavailable and therefore reducing the number of business operations being performed – regulatory fines and business disruption causing orders to be executed at an unfavourable price. 

Insurance

For the insurance business line, the key impacts that stood out were a backlogue of claims, meaning that they're not paid on time, and regulators forcing insurers to cover pandemic-related claims, even if they were explicitly excluded from the policy. In addition to these, insurers who sell their products through intermediaries (agents) may decide to keep supporting those businesses during the lockdown period to keep them alive, even if they aren't bringing in commissions.

Download the summary to read more

You can learn more about these impacts, and read more highlights from our discussions with subscribers to ORX Scenarios, in the summary of our discussions.