Defining resilience: Developing operational risk scenarios for UK insurance companies

Abstract

This paper provides insights on the link between operational risk management, disaster recovery (DR), business continuity planning (BCP), outsourcing and operational resilience, for financial services. Core of the analysis of this paper is examining the use of stress and scenario testing for operational risks, focusing on the UK insurance sector as a case study. Specifically, it presents a critical analysis on the application of this risk management tool in risk and crisis management, from a resilience lens. The aim of this practical paper is to highlight the relationship between DR, BCP, third party risk management (TPRM) and operational resilience from a scenario analysis angle and testing requirements. This comparison of existing regulatory prescribed stress tests supports the recommendations for the development of company-specific severe but plausible scenarios. Guidance on the development, design, assessment and quantification of idiosyncratic scenarios is presented, building on the lessons learned from the regulatory prescribed stress tests. Overall, this research highlights the application of scenario analysis and stress testing as a core element of risk management practices for UK insurance companies in meeting operational resilience requirements, while enhancing their DR, BCP, TPRM and their overall approach in managing operational risks. Insights on advances in scenario analysis and stress testing for cyber risks and operational resilience are sought, considering the developments around FinTech and providing practical guidance for their implementation. This article is also included in The Business & Management Collection which can be accessed at https://hstalks.com/business.