Scenario Refresh & Trigger Process Practice Benchmark

  • 3 March 2020

Knowing when to update your scenarios can be a challenge. Should you refresh scenarios annually, or is better to 'trigger' the process based on the loss events that happening around you? To help scenario practitioners at financial organisations understand how other firms update their scenarios, and therefore see how what could be doing differently, we conducted an ORX Practice Benchmark on this topic.

This Practice Benchmark is only open to subscribers to ORX Scenarios, our service dedicated to supporting scenario practice in the financial sector. Organisations who subscribe to ORX Scenarios get access to a library full of ready-to-use scenarios, handbooks and practice notes explaining key elements of scenario practice. They also join a global community of experienced scenario professionals to share ideas and experiences.

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We asked participants in this practice benchmark to share their process for refreshing their scenarios. As is the case with all ORX Practice Benchmark studies, each participating firm received an individual benchmark report showing where they sit compared to the other institutions who took part. As well as this, they also got an overall report analysing the trends and results. Read on for just some of the highlights from the survey.

How does the industry update operational risk scenarios?

How mature is industry practice?

Overall, scenario refresh processes are becoming more mature. Our results show that the industry is adopting more dynamic approaches, which are better designed to meet business needs and are more focused on managing risks at the right time.

However, there are still opportunities to enhance practices and improve efficiency. We identified five main areas where practice could be improved, made more efficient or where practice differs.

1. Take a 'group' or 'light-touch' approach to refreshing scenarios

While our practice benchmark found that organisations most commonly carried out a complete reassessment of their scenarios – including reviewing the storyline, risk drivers and impacts – some were taking a more efficient approach. This involved doing a 'light-touch' refresh or grouping similar scenarios together.

The 'light-touch' approach involves only updating the elements that have changed on a scenario that remains current, for example where transaction volumes are decreasing slightly. This saves time by not going through every part of the scenario. Alternatively, some firms are grouping scenarios with similar storylines and risks together. These would then be presented together in a workshop, taking advantage of having the relevant people in the room at the same time.

2. Triggers improve timeliness

The more mature organisations that took part in our practice benchmark are beginning to complement their annual review process with the use of triggers. To do this, they monitor information that provides insight on whether anything has changed that could impact a scenario. When the trigger is activated, the relevant scenario is then reviewed, with no need to then re-review it as part of the annual cycle. This improves the timeliness and efficiency of your review process.

3. Triggers can also enhance 1LOD engagement

Implementing a trigger-based approach brings other benefits. One of these is that organisations tend to see stronger and more proactive engagement from risk owners and the business. This is because using triggers means that the scenario is updated at the same time as the business works to manage changes in the environment.

4. Not all firms aim for 1LOD ownership

Historically, there has been a drive for the scenario process to be owned, run and driven by the first line of defence (1LOD). But this is changing. Our practice benchmark showed that organisations were almost evenly split between two approaches. One is aiming for 1LOD ownership, with second line of defence (2LOD) providing oversight and challenge. While, the other is 2LOD owning the process, but with lots of input from the first line.

5. The process of archiving scenarios can be improved

When should you archive or retire a scenario? Our survey showed that some organisations do not have a documented process, including a governance process, for this. This was an area that our study showed could benefit further from being formalised.

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