25.9 Scenario Planning
Effective strategic planning begins with scenario planning
Key Characteristics on scenarios:
Limited # of scenarios:
Each tells a story of how elements may interact with each other under different conditions
Test for internal consistency and plausibility
Explore joint impact of several variables and change multiple variables at one time to capture new states after major shock
Include subjective interpretation of factors that cannot be explicitly modeled
Attempts to capture the richness of range of possibilities \(\Rightarrow\) Lead the makers to consider changes they might otherwise ignore
25.9.1 Key Steps in Scenario Planning Process
Define scope:
(e.g. time frame, geography, market segment)
Identify major stakeholders:
(e.g. employees, owners, regulators, customers, competitors, suppliers)
Identify basic trends (and their influence on organization)
Identify key uncertainties:
- Leverage points of impact
Construct initial scenario theme
Check for consistency and plausibility
- Do outcomes fit together?
Develop learning scenarios:
- Identify themes and naming scenarios
Identify research needs:
- Areas that need additional research
Develop quantitative models:
- Should formalize some interactions in a quantitative model?
Evolve toward decision scenarios:
- Iterative process of reviewing scenarios with the goal of converging to test scenarios and generate new ideas
25.9.2 Insurance Example
Scenarios will be less detailed than a typical strategy or plan document
Goal is to generate a first-order approximation of the possible states
Best place to try this is the plan portfolio mix (e.g. coming year WP and ELR by segments)
Traditional unilateral planning approach:
Set planned premium and ELR based on current year base LR, cost trend, price change, target premium volume, LR
Caveat: Not thinking through other possibilities \(\Rightarrow\) Not reacting properly while fixating on “making plan”
Commitment to only one plan leads to organizational inertia, inflexibility that is unrealistic and potentially detrimental to the firm
e.g. If price decrease, company might want to reduce premium volume instead of the inflexibility of making the planned premium volume
25.9.2.1 Basic Scenario Planning Example
Must decide ahead of time:
Range of scenarios and relative likelihood
Responses to those scenarios
Plans must have enough detail to give them operational weight
Advantages:
Thinks through responses beforehand and can agree on best response ahead of time
- With the rate change example, it allow u/w-ers to be flexible in their approach in case prices are not as expected
Saves time during a crisis
Operational inertia is reduced, flexibility is built into the system