Risk Management With Monte Carlo Analysis

Faced by the COVID-19 pandemic that struck much of the world in 2020, the All-England Lawn Tennis Club, which governs the Wimbledon Tennis Championship, cancelled its 2020 event, as opposed to postponing it, because doing so allowed it to collect on pandemic insurance, reportedly worth £250 million.

This contrasts with the French Open which, it is reported, could face losses of €260 million.

We cannot say whether the managers of the French Open had considered a pandemic as a risk to their business. If they had, then they chose to tolerate it.

In contrast, the All-England Tennis Club identified the risk, assessed the impact on its business, evaluated the cost of insurance, and chose to treat the risk by buying that insurance.

This course shows you how to do the same, and gives you a fully functioning Risk Register in an Excel spreadsheet that includes Monte Carlo simulation. The course shows you how to:

1. Locate what is at risk in your business, enterprise, or organisation.

2. Identify each risk and explain in words what the risk event is and the impact you anticipate it having on what is at risk.

3. Analyse each risk, expressing its probability of occurrence and impact in three-point estimates.

4. Evaluate the aggregate risk exposure, which is the combined effect of all the risks you have identified and analysed.

5. Develop mitigations for each risk, quantifying the cost and the proportion of risk mitigated.

6. Evaluate the residual risk for whatever combination of mitigations you want to consider.

The last step is vital, because it allows the Chief Executive to ask “what if” questions and the risk manager to give immediate answers.

Furthermore, the method allows the risk manager to elicit the expertise and insights of those who know the business well and capture their “collective wisdom” in the numbers in the risk register.

The course is consistent with ISO 31000, the international standard on the implementation of risk management.

The risk register provided uses standard Excel arithmetic to calculate one thousand risk scenarios, drawing on the three-point estimates of risk impact and probability of occurrence. The risk register constructs two histograms that show:

1. The extent of the aggregate risk and its probability profile; and

2. The extent of the residual risk after mitigations and its probability profile.

You need no specialist knowledge to use the spreadsheet. All you need to be able to do is open and navigate a spreadsheet and enter numbers and text. The rest is done for you.

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Frequently Asked Questions

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