What is scenario analysis in risk assessment?

Scenario analysis in risk assessment involves predicting possible future events and their consequences in order to better understand potential risks and opportunities that an organization might face. This method allows organizations to explore different plausible futures by creating detailed narratives or scenarios based on varying assumptions about the future environmental, economic, social, and technological factors that could impact their operations.

By employing scenario analysis, organizations are equipped to assess the likelihood and impact of different risks, allowing for more informed decision-making and strategic planning. It encourages a proactive approach, helping businesses not only to prepare for adverse impacts but also to identify opportunities that can arise from changes in the market or regulatory environment.

In contrast, the other options focus on different aspects of business and financial strategy that do not pertain directly to the predictive element inherent in scenario analysis. For instance, identifying potential new markets relates to market research and expansion strategies, calculating financial returns is a quantitative assessment of investment performance, and managing operational efficiencies focuses on optimizing existing processes rather than anticipating future risks.