The Cambridge Centre for Risk Studies in the UK has collaborated with the insurance industry to provide guidance for “catastrophic shock” scenarios.

Working with the industry-funded Lighthill Risk Network, Cambridge looked at a cyber blackout case study, exploring the interlinked nature of this event and its global financial ramifications.

Another delved into the potential for disasters – including natural catastrophes – to cascade through global systems, and found disproportionately negative impacts on developing countries.

The exercise has been co-funded by Aon Reinsurance Solutions and Lloyd’s Tercentenary Research Foundation, and is chaired by Aon’s which co-funded the research, says the potential for disasters to cascade through systems is increasing.

Aon Reinsurance Solutions Chairman Dominic Christian, who oversaw the project, says It is critical for the insurance sector, governments and disaster risk management agencies to have a common framework for best practice when planning for potential catastrophic shock scenarios.

Scenario analysis uses creative thinking about plausible events to act as a “stress test” to assess an organisation's capacity to be resilient, testing the efficacy of solutions and decisions.

Scenarios are increasingly being used by underwriters, analysts, risk managers and actuaries to better understand and test the characteristics and consequences of unknown, uncertain, or unexpected future events.

“As societies and economies develop and become more interconnected, major disasters have the potential to trigger severe losses across a potential range of insurance classes, and so represent acute operational risks to insurers,” Lighthill CEO Dickie Whitaker said.

“We hope these reports will provide useful scenario development best practice tools for the insurance industry and for governments.”