How do you run operational risk scenario analysis workshops that produce credible loss estimates?

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AcadiFi · Accepted Answer

Operational risk scenario analysis estimates the frequency and severity of tail events that are too rare to be captured in historical loss data — cyberattacks, rogue trading, major fraud, pandemic disruption. Good workshops combine expert judgment with structured elicitation techniques to reduce bias and produce defensible estimates.

Workshop methodology for Crestwell Financial: (1) Pre-read — distribute a one-page scenario narrative (e.g., 'a senior trader circumvents controls for 18 months causing a $200M loss') with industry benchmarks and internal data. (2) Individual estimation — participants independently estimate frequency (1-in-X years) and severity (best-estimate, 95th percentile, 99th percentile) BEFORE discussion, avoiding anchoring. (3) Discussion of dispersion — display ranges anonymously and discuss drivers of disagreement. (4) Revision and convergence — participants re-estimate after discussion. (5) Fit a distribution — typically lognormal for severity, Poisson for frequency — to produce a loss distribution. (6) Stress the assumptions — what if correlations are higher? What if concurrent events?

Key biases to counter: availability (recent events overweighted), anchoring (first number dominates), overconfidence (ranges too narrow), and motivated reasoning (reducing estimates to reduce capital requirements). Include diverse participants — business, risk, audit, IT, legal, and external experts. Document assumptions meticulously; regulators under Basel II/III AMA and now SA approaches scrutinize scenario methodology. Outputs feed the 99.9% operational risk capital calculation and the internal operational risk profile used in ICAAP.

How do you run operational risk scenario analysis workshops that produce credible loss estimates?

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