How quantitative risk analysis can transform insurance buying and other business decisions

Alex Sidorenko, group head of risk, insurance and internal audit at Serra Verde Group, is speaking at the Risk-!n conference  on May 30-31 in Switzerland.

Ahead of his session, StrategicRISK caught up with him to find out what he would be discussing and why risk managers should attend.

 

What is quantitative risk analysis?

Alex Sidorenko: The idea behind quantitative risk analysis is to represent business assumptions as ranges of uncertainty.

When a business plans and forecasts, it makes a lot of assumptions. Traditionally it would have to commit to a certain version of the future, because until very recently we didn’t really have the technology or the capability [to capture a range].

The maths was there because it is from the 15th century, but the technology solutions couldn’t really handle it.

So, a business was essentially forced to bet on a single version of the future And that’s not good governance because many of the assumptions are extremely uncertain and volatile.

Quantitative risk analysis is bringing that [range of uncertainty] back into the conversation.

“The idea behind quantitative risk analysis is to represent business assumptions as ranges of uncertainty.”

For example, imagine you were thinking of switching from one chemical to another for a processing plant. The first can be sourced locally, but the other has to come from overseas, and every time there is another war in Europe, the price skyrockets. That’s a piece of information that you would think executives would want to know when they’re deciding.

Because yes, the second chemical is cheaper, but it’s also much more volatile, so it’s cheaper most of the time, until it suddenly isn’t. And when it isn’t it kills your economy altogether.

Where we used to be able to multiply together single scenarios, now quantitative analysis allows us to multiply together distributions. We have the technical capability to perform the same calculations with whole arrays of numbers.

What are the main advantages of quantitative risk analysis?

Sidorenko:  Ultimately, quantitative analysis means that your budget, CapEx, or cashflow forecast suddenly becomes a distribution and you can see all the scenarios in front of you, and compare the proportion of bad scenarios versus good ones. Based on that, you can make a judgement on whether something is a good decision or not.

My experience is that when you start doing this, many of your decisions change. You think one plant design is better, but when you add the volatilities together you suddenly realise it’s only better 5% of the time.

It’s the difference between going into the forest with a small torch and a humongous one which lights up so much more space. Suddenly, you see that you have more options than you thought.

“When we see that somebody quotes us five times the price, we can renegotiate from a position of more information than before. That allows companies to save millions and millions of dollars.”

Intuitively, some executives commit to a certain version of the future. You can highlight through risk analysis that actually option B is better in the long term or allows them to make more money. It really changes the completeness of the discussion.

It’s also practical for insurance buying. When we calculate how much the risk is worth, we can also calculate how much the insurance should be. When we see that somebody quotes us five times the price, we can renegotiate from a position of more information than before. That allows companies to save millions and millions of dollars.

It’s not just improved decision making. That’s a wonderful side product, but saving a lot of money immediately on the back of a risk analysis is a much more pragmatic and simple objective.

What will people learn at your risk-in session?

Sidorenko: In my immersive workshop, participants will get hands-on experience with quantitative risk analysis and its impact on risk reduction and insurance savings.

Participants will learn how to quantify risks associated with a business decision, they will work through steps required to ensure fair insurance pricing and to avoid both under and over insurance.

By the end of this workshop, participants will gain a thorough understanding of how to leverage quantitative risk analysis to make informed decisions, reduce costs, and effectively manage their insurance coverage.

This used to be very complicated and only few risk professionals on the planet could do it because they had math degrees.

“It all happens in native excel which opens up so many opportunities.”

But the technology has now evolved so much that we can actually run Monte Carlo simulations inside Excel and most of the risk analysis can be done on ChatGPT, which does Monte Carlo modelling pretty well.

It’s suddenly became very much more affordable because it takes less time and effort, and you don’t need to invest into special dedicated software as much as you had to in the past.

And once the risk manager builds the risk model, anyone in the company can continue using it and make changes and re-simulate it. It all happens in native excel which opens up so many opportunities.

To find out more about the conference, or to register to attend, visit the Risk-!n website.