Simon: Hi, everybody, and welcome to the latest ORX podcast.
Simon: My name is Simon Johnson and I'm joined by my colleague Rob Reay-Jones today. We run the scenario service, which is one of the longest running services with over 70 subscribers currently contributing to the community.
Simon: Today, we wanted to provide you with an overview of our recent state of the industry report, which forms part of a wider project we've been running throughout 2024.
Simon: This year, we've been running a practice benchmark study, that has allowed all of our subscribers to benchmark the maturity of their scenario process against the rest of the industry similar institutions and peers.
Simon: Each participant received bespoke reports as well as a maturity matrix in the first half of the year. Since then, we've written our state of the industry report and have plans for further deliverables that we will tell you about at the end of this.
Simon: We felt that this report was necessary now, as it was clear from our conversations with subscribers that if we are to realise the full potential of scenarios as an active value adding risk management tool, institutions must leverage industry best practice solutions to optimise their scenario, process.
Simon: So, Rob, the report starts off by highlighting what changes have been made recently and I wonder if you could summarise the progress to date.
Rob: Sure. Thank you Simon.
Rob: So we have clear evidence from this year's study, also from a discussions with the community in recent months and also from last year's study on scenario quantification, that much progress is being made across the industry to make the scenario process more efficient and more streamlined and there are three main areas where we've seen that progress.
Rob: The first is that the scenario process is becoming easier and clearer for the business to drive, because of what the second line is doing to standardise the different stages of the scenario process, to look for synergies across different programs, and also clarify to the business what's expected of them and help them deliver on those expectations.
Rob: So there's a lot that's happening around designing new tools, new guidance, new standards that is helping the businesses take ownership of the scenario process and that's a common goal for many.
Rob: The second area where we've seen quite a bit of development is the extent to which the scenario process is becoming more digitised and more automated, and that means a couple of things.
Rob: One is that the data that feeds into developing and assessing scenarios is becoming easier to visualise in more engaging ways, easier to workshop, and also easier to monitor for changes in the environment.
Rob: The other thing we're seeing is that automation is making it easier to manage each stage of the scenario process, whether it's collecting data, monitoring automated triggers, or even tracking actions through automated workflow tools.
Rob: The third and final area where we've seen a lot of activity and all progress is broader and with more ramifications, and that's the extent to which scenarios are evolving to become better at capturing a more dynamic and more volatile and more complex risk environment.
Rob: And the advances we're seeing here are down to a couple of things. Yes, better tools, better taxonomies, better benchmarking, but also and quite simply, more collaboration, more socialisation of scenario challenges, whether that's at the planning stage, at the workshop stage, in regular working groups, across risk processes, is to share insights into what is changing or new in the environment.
Simon: Thank you Rob. It sounds like a really good platform for future progress.
Simon: In the survey, we also asked about plans for future improvements to scenario process. What have we here?
Rob: So the kinds of enhancement initiatives that our subscribers and the wider industry are currently working towards fall under six main headings.
Rob: Now three of these relate to how they identify and select scenarios and keep their scenarios up to date, while the other three focus really on what they're doing to improve how they then develop, assess, and oversee the execution of scenarios.
Rob: So the first of these of these six priorities is better coverage and specifically ensuring that a portfolio covers a broader and more strategic range of risks that are also aligned to business priorities.
Rob: So what we've had here is that many are working to align their portfolios more closely to wider strategic priorities, to make them more inclusive of emerging and resilience risks, and to make them more capable of capturing risk interconnections. And what that requires is more collaborative campaign planning across lines of defense risk processes and scenario programs.
Rob: The second priority is around the review and reassessment part of the process, and specifically how to streamline review and reassessment to make them not just more data-led, but quicker, more standardised, and easier for the business to perform. And that matters because what firms are looking for portfolios that are both very relevant and can evolve at the same pace as the risk landscape, but without making that process difficult and resource and time intensive.
Rob: The third priority is something we've been focusing on with our community for the last 2 or 3 years, but whether there are now definite signs of evolution and that's triggers, now, what many are focused on doing here is making the trigger process both more effective and more efficient by using metrics that are easier to monitor, can drive the changes the second line expects to see and are easier to discuss and socialise, and also metrics that are set at the right level of granularity at a scenario portfolio level, and more aligned to other risk processes. And ideally that can be automated as far as possible, but this is an area where there's considerable variation in both the level of maturity that's being achieved and the kinds of triggers that institutions want to develop and the sort of value and the outcomes they want to get from them.
Rob: So a big priority, but an area where practice still ranges widely.
Simon: Yes, and alongside those three initial priorities, we heard about specific planned enhancements aligned to scenario development and assessment.
Simon: The first one is really regarding integration and harmonisation. And this is another topic we've spoken about a lot over the past couple of years. I think what's clear now is that institutions must harmonise the right assessment steps across different scenario programs.
Simon: However, full integration is not always necessary or compliant with regulator needs. Therefore, institutions need to identify the right planning data, workshopping, tooling and documentation efficiencies for them.
Simon: The second one is deploying the right technological capabilities to scenario assessment. So using digitised assessment tools, integrating databases and automating workflows can make the process more engaging, efficient, reliable, and cost effective.
Simon: Finally, institutions are looking at ways in which they can drive more effective review, challenge and validation to make it faster and easier for senior stakeholders.
Simon: And the second line of defense to provide data led review and challenge.
Rob: And Simon, and I think it's really important to emphasise that those those six priorities we've heard about have really helped us to plan our activities for 2025, to really focus on the things that matter most to our community.
Rob: So, the priorities you singled out there around scenario development assessment are going to be a really big focus of the work we do in the first half of 2025. We're planning to launch a new process benchmark study, but focusing this time only on development assessment.
Rob: So, it will be a much more granular benchmark that will enable our subscribers to self-assess themselves at a more in-depth level, to get more insights and a more accurate benchmark. And the outputs from that will allow our community not just to benchmark themselves more accurately against peers, but it also helps us to improve the scenario library, because a key area of weakness in this space, as we know from this year's study, is risk drivers. So, alongside the next round of benchmarking, we'll also be developing a new, risk driver inventory that will be fed by subscriber data.
Rob: So subscribers own risk drivers, which will then use to curate and design and develop a new inventory of our risk drivers that then will feed through into our scenario analysis workbooks to make them better our Scenario Development Handbooks, and of course, the reports that are derived from that scenario library in the insight platform.
Rob: And of course, we'll be publishing guidance on how to design and implement risk drivers alongside the new inventory.
Rob: In other words, our process benchmarking is really now much more closely linked to the continual improvement of our data on our standards, in our scenarios and the outputs we're able to derive from our library data.
Simon: Thank you Rob.
Simon: So we're going to be tackling some of those priorities mentioned in the report head on in the scenario service next year.
Simon: If you'd like to get more information on this report, then there are a couple of things you can do.
Simon: So, scenario subscribers can access all of the materials discussed in this episode on the scenarios section of the ORX website.
Simon: Just head to Risk Resources in the menu and select our scenarios and they will all be listed there. A shorter version of this report is available for everyone to download for free on our website at orx.org. The link will also be shared in the show notes.
Simon: So, all it leaves me to say is thank you Rob for your insights and thank you to everyone for listening.
Simon: You can find more podcasts from us on your favourite streaming platform. Simply search for the Operational Risk Podcast to find us and don't forget to subscribe so that you never miss an episode. We look forward to joining us again soon.
