Is a Pandemic Scenario Just a Recession Scenario?



Recently, I wrote about how a pandemic might be a useful scenario to have for scenario analysis. As I thought about how I might design such a scenario I considered: should I assume a global recession for the pandemic scenario?

A pandemic, by definition, is an outbreak of a disease that affects people around the globe. Therefore, it is reasonable to think that it would slow the flow of goods and services through the world. Repercussions would be felt everywhere – from businesses reliant on tourism and travel to companies dependent on products manufactured in countries hit the hardest.

For an initial pass, using a recession seems sensible. However, I believe this “shortcut” omits a key trait needed for scenario development: creativity.

The best scenarios, I find, come from brainstorming sessions. These sessions allow challenges to be made to status quo and preconceptions. They also help identify risk and opportunity.

To immediately consider a recession scenario as “the pandemic scenario,” then, might not be advantageous in the long run.

As an exercise, I challenged myself to come up with questions that aren’t immediately answered when assuming a generic recession. Some that I asked were:

  • How do customers use my business? Do they need to be physically present to purchase my goods or use my services?
  • How will my business be impacted if my employees are not able to come into work?
  • What will happen to my business if there is a temporary shortage of a product I need? What will happen if there is a drawn-out shortage?
  • How dependent is my business on goods and services provided by other countries? Do these countries have processes in place to contain or slow down the spread of the disease?
  • Does my business reside in a region of the country that makes it more susceptible to the impact of a pandemic (e.g., ports, major airports, large manufacturing)?
  • How are my products and services used by other countries?
  • How can my company use technology to mitigate the impacts of a pandemic?
  • Is there a difference in the impact to my company if the pandemic is slow moving versus fast moving?

These are just a few of the many questions to consider for this analysis. Ultimately, the choice of whether to use a recession or not rests with the scenario development committee. To make the most informed decision, I would urge the committee to make questions like these a part of the discussion rather than taking the “shortcut” approach.

Jonathan Leonardelli, FRM, Director of Business Analytics for FRG, leads the group responsible for model development, data science, documentation, testing, and training. He has over 15 years’ experience in the area of financial risk.


RELATED:

Do You Have a Pandemic Scenario?

VOR Scenario Builder: Obtaining Business Insight From Scenarios

 

Do You Have a Pandemic Scenario?



A recent white paper I wrote discussed the benefits of scenario analysis. The purpose of scenario analysis is to see how economic, environmental, political, and technological change can impact a company’s business. The recent outbreak of COVID-19 (“Coronavirus”) is a perfect example of how an environmental event can have an impact on the local and, as we are finding out, global economy.

As the world watches this virus spread, I suspect there are some companies who are thankful they created a pandemic scenario. Right now, they are probably preparing to take steps to enact the procedures they created after running the scenario. I also suspect there are other companies who might be in a bit of panic as they wonder how much this will impact them. To those companies I suggest they start considering the impacts now. While we hope this will not reach full pandemic level, the future is unknown.

 

Jonathan Leonardelli, FRM, Director of Business Analytics for FRG, leads the group responsible for model development, data science, documentation, testing, and training. He has over 15 years’ experience in the area of financial risk.

Real Time Learning: A Better Approach to Trader Surveillance

An often-heard question in any discussion of Machine Learning (ML) tools is maybe most obvious one: “So, how can we use them?”

The answer depends on the industry, but we think there are especially useful (and interesting) applications for the financial services sector. These consumers have historically been open to the ML concept but haven’t been quick to jump on some potential solutions to common problems.

Let’s look at risk management at the trading desk, for example. If you want to mitigate risk, you need to be able to identify it in advance—say, to insure your traders aren’t conducting out-of-market transactions or placing fictitious orders. The latest issue of the New Machinist Journal by Dr. Jimmie Lenz (available by clicking here) explains how. Trade Desk Surveillance is just one way that Machine Learning tools can help monitor a variety of activities that can cause grief for those tasked with risk management.

Would you like to read more about the possibilities ML can bring to financial services process settings? Download “Real Time Learning: A Better Approach to Trader Surveillance,” along with other issues of the New Machinist Journal, by visiting www.frgrisk.com/resources.

Introducing the New Machinist Journal

Who are the new machinists, and what are their tools?

The machinists of the 21st century are working with Artificial Intelligence (AI) and Machine Learning (ML), turning what has been science fiction into science fact. From learning algorithms that nudge us to buy more stuff to self-driving vehicles that “learn” the highways and byways to deliver us to our destinations safely, AI and ML are attracting considerable attention from a variety of industries.

FRG is currently researching and building machine learning proof-of-concepts to fully understand their practical applications. A new series, the New Machinist Journal, will explore in detail some of these applications in different environments and use cases. It will be published regularly on the FRG website. Volume 1, “What Artificial Intelligence and Machine Learning Solutions Offer,” is an overview of the subject, and is now available for download (click here to read it).

For more information, contact the FRG Research Institute, Research@frgrisk.com

Quantifying the Value of Electricity Storage

ABSTRACT: This research discusses the methodology developed to hedge volatility or identify opportunities resulting from what is normally a discussion constrained to the capital markets.  However, the demand (and the associated volatility) for electricity in the United States has never been more pronounced.  The upcoming paper, “Quantifying the Value of Electricity Storage,” will examine the factors that have led to the growth of volatility, both realized and potential.

There is widespread recognition of the value of energy storage, and new technologies promise to expand this capability for those who understand the opportunities being presented to firms involved in different areas of electricity generation. Objective tools to valuate these options, though, have been limited, as has the insight into when mitigation efforts make economic sense.

In order to answer these questions for electricity generators of all types we have created an economics-based model to address the initial acquisition of storage capacity, as well as the deployment optimization solutions, based on the unique attributes of the population served.

Links to the paper will be posted on FRG’s social media channels.

Turning a Blind Eye to the Risky Business of Incentive-based Sales Practices 

Should you be monitoring your sales activities to detect anomalous behaviors?

The use of sales incentives (commissions, bonuses, etc.) to motivate the behavior of salespeople has a long history in the United States.  We all hope to assume the initial structuring of incentive-based pay is not intended to have nefarious or abusive impacts on its customers but, in a number of recent and well-publicized stories of mistreatment of both customers and customer information, we have discovered that these negative consequences do exist.  Likely, the business practice of turning an administrative blind eye to the damage done to consumers as a result of these sales incentive programs has played an even greater role in the scale of abuse that has been uncovered over the last decade.  In the most recent cases of unchecked and large-scale customer abuse, with particular attention focused on the financial services industry, this business paradigm of tying employee benefits (defined as broadly tying employment and/or income potential to sales) were resolved through arbitration and frequently typecast as “a cost of doing business”.

Today, are you putting your business, and all those associated with its success at risk by turning a blind eye to the effects of your business practices, including your employee incentive programs?  There are new consequences being laid on to corporate leaders and board members for all business practices used by the company, and the defense of not knowing the intricacies and results of these practices does not protect you from these risks.

We have developed a methodology to detect both customer sales and individual product behaviors that are indicative of problematic situations that require additional examination.  Our methodology goes beyond the aggregate sales, which are primarily discussed in the literature, to highlight individuals and/or groups that are often obviated when analyzing such data.

A forthcoming  paper, “Sales Practices: Monitoring Sales Activity for Anomalous Behaviors” will explore these issues, and a resolution, in depth. Visit any of our social media channels for the link.

 

 

 

Subscribe to our blog!