Risk: ignorance isn’t an excuse for clients and is inexcusable for insurers

I have lifted this text from a recent Linkedin discussion – once I establish the source I will share that too – and wonder what will it take for the insurance industry to tackle known limitations?

“Recent experience in the Americas has shown that the hidden indirect costs of ignored or unforeseen risks are between five and ten times higher than claims payments which implies an inability to see, anticipate and measure the scope of risk interdependence in complex business environments by clients, brokers and underwriters alike.”

This is precisely the point that I have been making and WHY I WILL persist with my attempts to make COMPLEXITY ANALYSIS & MANAGEMENT a cornerstone of future insurance rating.

I am far from alone in highlighting (1) the problem (2) the potential impact. In 2010 and, again, in 2011 Mactavish Consulting produced really worrying reports. The commentaries from PwC and Citi should have very loud alarm bells ringing…I can’t hear them! Rather the findings are labelled as “inconvenient truth” and swept under a well-worn carpet in the hope that the spark, that will betray the increased fire risk, doesn’t happen on the current watch!!!

Are the Strategic risk functions and shareholders being kept in the dark whilst “wider economic climate” is readied as the excuse for the inevitable losses?

British firms contain new risks that have not been properly understood or reflected. As a result of this combining with existing pressures on insurers, the insurance sector and the companies it serves could be facing a perfect storm that would form another phase of the financial crisis.Our research suggests that company managements, insurers and investors all need to wake up to face this reality.”

Ignorance is no excuse for clients but inexcusable for underwriters

Insurers continue to “dither”, despite recognition of complexity as a source of risk, the effect of inter-connectedness upon probability, the glaring limitations of conventional rating, lack of reliable current financial (risk) data and potentially misleading analyses of pre-digital era stats. Too many people are clinging dearly to techniques they have grown up with…because, well, it is what they know(!) even though the pace and demands of inter-connected business systems has outstripped conventional capabilities.

Our industry is geared for “knowns knowns” i.e. known probability known financial impact, but seriously ill-equipped for the impact of uncertainty i.e. low probability events.

Ignore risk and it comes back through inter-connections as uncertainty: the butterfly effect. FRAGILE.

Interrogate the data, measure complexity and uncertainty can be reduced whilst, previously unseen, sources of risk are identified: extending the “risk horizon”.

All parties benefit from a culture of loss prevention: ROBUST.

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