using economic downturn magnitude and duration forecast to manage your future

8/14/2019 Using Economic Downturn Magnitude and Duration Forecast to Manage Your Future

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Riskope International SA , 2008-*, www.riskope.com

Using Riskopes Economic

Downturn Magnitude and

Duration Forecast toManage your Future

(Based on Nov. 2008 Forecast by Riskope)

Franco & Cesar Oboni

Riskope International

Rational and sustainable risk managementrequires quantitative understanding of

scenarios
http://www.riskope.com/http://www.riskope.com/


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Because we know this is manageable

we made it our mission to build the mosteffective approach.

25 minutesMonths if not Years...


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Our Lives, Corporations, Projects

Can be seen as a never ending succession ofcycles of growth, peace, turmoil, i.e. cycles of

great changes we call crises.

Fast growth can be seen as a positive crisis: insome cases it can, however, suddenly turn into a

negative crisis.

A crisis is a decisive moment, particularly in timesof danger or difficulty.


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Generic Phased Crisis ModelPhase 1

Potential

Phase 2

Latent

Phase 3

Acute

Phase 4

Return

Phase 1

Potential

Desired Level of

Service

Tolerated level of

disservice (minor

emergency)

Max tolerateddisservice limit (max

emergency)

Crisis

Catastrophic crisis

Triggeringpoint for theemergencyplan

Controlledcrisis

Uncontrolled c

risismay evolve tocatastrophicconsequences

One crisis cycle (time)

EventInte

nsi

eme

rgenc

yto

Emergency thatdoes not evolve int

oa crisis


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Each point of the crisis trajectory

has: A probability of occurrence

An associated cost (loss, consequencecould be

positive or negative, but lets focus on the negatives

for the moment)

0

0.1

0.2

0 10 20

Million $

Pr

obabilityper

Annum

thus a Risk, as

Risk=probability x cost

of consequence.


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It is in the Latency Phase that the

best returns are to be expectedfrom:

Analyzing what could go wrong, and how much it

would cost the company: Risk Assessments Analyzing the means to bring the risks towards a

tolerable level in a sustainable way: Risk

Management

Analyzing how to behave when a residual risk

hits, i.e. Crisis Management


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ERM excellence criteria:

Risk/reward optimizationEnterprise wide view of risksControl processes for risks

including:

Hazard identificationRisk evaluationRisk management and loss control

Benchmarking against predefined risktolerability criteria


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The future lies in

using Risk to weighdecisions, rather than

just guiding mitigation.


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Scenarios can be prioritized by their intolerable part of risk. A clear

road-map becomes available for rational and sustainable RM/ERM.


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* A mathematical model is used

Bar graph for the Intolerable portion of

the scenarios

Of the 14 initial scenarios, seven are abovetolerability, but only three are top attention

priority.


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Case Study

Several mid-sized companies face

the present economic downturn


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Hazard Analysis

Lets define probability and magnitude of

the hazard of this economic downturn.


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Crisis Forecast, November 2008

Duration Probabilities :30% less than 1.5 years Spring 201080% less than 3 years Fall 2011

10% longer than 6 years past 2014

Magnitude Probabilities:20% present situation will persist

25% significant worsening55% critical evolution ofdisservice


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Measure of the Depth of Recession: loss of service

and control in the country system, for which we can

build a scale as follows, by drawing examples fromthe past:

Level 1:Persistance, or Status Quo, i.e. generalized

budget cuts in the non- key services, for examplestarting with culture, arts, then going to education[1];

some protests[2].

[1] cuts are already being performed in various countries,

France, Italy etc.

[2] also in act, Russia, Japan, etc
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Significant Worsening, i.e. Level 2 & 3.

Level 2:Generalized Poverty, unemployment up to

12%, vanishing maintenance of civil systems, reduced

health programs, salaries of public officers in decline,protests, criminality, and some violence[3].

[3] already reported in some G20 countries including recent

riots in Greece etc.


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Significant Worsening, i.e. Level 2 & 3. (cont'd)

Level 3:Severe Impoverishment unemployment over

12%, severe reductions of public transportation offer[4],

gradual replacement of police forces with armed

forces[5], reduction of retirement plans, protests andcriminality, high violence.

[4] example: reduction of RR network and service

[5] examples in Italy, US, under the war on terrorism, or war onviolent crime cover


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Level 4:Critical evolution of disservice

(Disruption of Order and Quality of Life),

generalized rioting, wide spread criminality

and sacking, and total loss of control.


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Apparently some countries in the G20 group have

already passed the Status Quo level, but as we are

developing this study for a theoretical country

within the group, we will not bother with theseparticular cases here.


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Crisis Forecast,

November 2008


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Consequence Definition

These will be different for everyclient/industry or organization


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Example 1: a company that builds

specialty motor vehicles could have: Reduction of 20% of routine paying services

revenues, if the downturn is persistent, i.e. 2

M/yr Reduction of 50% of overall sales if downturn

worsens significantly, i.e. 5 M/yr

Reduction of 70% of overall sales if downturnhas critical evolution, i.e. 7 M/yr


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P

C5 M/years

0.200.25

0.55

Tolerable

Intolerable

Persistent

Significant Worsening

Critical Evolution

7 M/years2 M/years

Risk: 0.4Risk: 1.25

Risk: 3.85

Intolerable: 0.07Intolerable: 0

Intolerable: 1.53

Sometimes a risk assessment

confirms intuitive feelings!


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a company building special motor

vehicles will focus it efforts tomitigate in this order:

1) Critical evolution

2) Significant worsening3) Persistent

Mitigative scenarios, possibly including

diversifying etc. will have to be studied


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Example 2: a Discount Retailer

Reduction of 60% of routine services if thedownturn is persistent, i.e. 6 M/yr

Reduction of 30% of overall billable if

downturn worsens significantly, i.e. 3M/yr


donwturn has critical evolution, i.e. 1M/yr


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P

C3 M/years

0.200.25

0.55

Tolerable

Intolerable

Persistent


Critical Evolution

6 M/years1 M/years

Intolerable: 0.16

Risk: 0.75

Risk: 0.55

Intolerable: 0

Intolerable: 0Risk: 1.2

Status quo may mean, quite

surprisingly, highest priority!


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a Discount Retailer will have the

focus it efforts to mitigate in adifferent order:

1) Persistent

2) Significant worsening3) Critical evolution

Mitigative scenarios, possibly including a

line of top quality items etc. will have to bestudied


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Example 3: a company that

services motor vehicles could have: Reduction of 40% of routine services if thedownturn is persistent, i.e. 4 M/yr

Reduction of 60% of overall billable ifdownturn worsens significantly, i.e. 6M/yr


donwturn has critical evolution, i.e. 3M/yr


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P

C4 M/years

0.200.25

0.55

Tolerable

Intolerable

Persistent


Critical Evolution

6 M/years3 M/years

Intolerable: 0

Risk: 1.5

Intolerable: 0.01

Risk: 1.65

Risk: 0.8 Intolerable: 0.24

Highest risk does not

necessarily mean highest

priority!


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a company that services motor

vehicles will have the focus in thisorder :

1) Significant worsening

2) Critical evolution 3) Persistent

Even thus the risk of the critical evolution is higher, the

intolerable part of the significant worsening is more

critical. Possible mitigation: advertisement and lowered

prices right now!


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Scenarios will be prioritized by their

intolerable part of risk.

Therefore a clear road-map becomes

available.

Transparent decision can be taken

leading to a rational and sustainable

RM/ERM.


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Details available upon request via

contact page at

http://www.riskope.com

These results can help building

rational risk managementstrategies.

Contact us,Franco & Cesar Oboni

Riskope International

using economic downturn magnitude and duration forecast to manage your future

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