Scenario Stress Tests to Assess Risk Exposure and the Value of Mitigations
undertaken in an annual process that maintains and adjusts a short list of high priority threat areas. Cambridge Centre for Risk Studies prescribes additional structure to the identification or scanning process by producing a long and relatively static list or taxonomy of threat classes. The goal of the taxonomy is to provide a boundary for the subsequent risk discussion, not the details of particular threats that can be placed within the taxonomy. When considering the business environment of any company, it is helpful to have a reference to a generalised structure representing different risk areas. For the purposes of discussion in this case study, we refer to the classes within the Cambridge Taxonomy of Business Risks in Figure 7 to guide our discussion of the most significant areas of business risks facing energy value chain companies.
A more comprehensive risk study would comprise the six steps shown in Figure 6. This case study reviews the qualitative assessment of three shock scenarios. This is associated with the third stage in the cycle - Evaluate. It is worth a few details here on the prior stages of the Risk Management Cycle, which are to identify and specify scenarios. Identification, the first stage of the cycle, can be undertaken by elicitation from sample groups of staff members, who represent the breadth and depth of the organisation, and external experts; and also by reviewing the literature for threats identified or explored there. In the context of both top risks and emerging risks, this basket of activities may be called horizon scanning, and is usually
Figure 6: Cambridge Risk Methodology - Risk Management Cycle
1. IDENTIFY Compare list of candidate risks against comprehensive list of causes of business distress 2. SPECIFY Make each threat specific by expressing it as a scenario of explicit metrics and timeline 3. EVALUATE Apply each scenario as a stress test to quantify ‘enterprise impact’ on financials of the enterprise 4. PRIORITISE Rank scenarios and risks according to priorities of the company and an explicit risk appetite 5. MITIGATE Define management actions that will manage or minimize risks to evaluate value of risk reduction 6. MONITOR Routinely check how risks are changing, and horizon-scan to identify comparable emerging risks
Source: Cambridge Centre for Risk Studies
Scenario Applications: Stress Testing Companies in the Energy Value Chain
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Cambridge Centre for Risk Studies
