The financial crisis is likely to drive more insurers to use state-of-the-art scenario analysis to evaluate future risk, a Swiss Re report claims.

The company’s latest sigma report, Scenario analysis in insurance, identifies rising demand for the method among insurers, regulators and ratings agencies.

Scenario analysis allows insurers to examine the potential impact of catastrophic events on the firm’s financial position as reflected by movement in a wide range of variables such as business volumes, asset prices and interest rates.

Insurers then use model outcomes to identify appropriate risk pricing and mitigation strategies.

“Ultimately, the use of scenario analysis can help insurers avoid making poor decisions and to identify growth opportunities that could increase the return on equity and reduce income volatility,” the report says.