An INCOMPLETE guide to risk-based insurance decisions!:: new report from PwC

The momentum that MAY bring us to a, much needed, "tipping point" in Risk Management is certainly gathering!

imageHOWEVER, this latest report, Strategic risk management: Facilitating risk-based insurance decisions from PwC "disappoints" despite identifying some key elements! It illustrates where we, currently, fall well short of what is required and offers a, dangerously incomplete perspective.

I could not agree much more with the following blurb from PwC. BUT, having skimmed through the report, I do find it incredible that, in 2012 and knowing what we do about the inter-connectedness of business in the Digital Age, a report such as this (that runs to 17 pages) contains no mention of COMPLEXITY!

Many enterprise risk functions do reasonably well identifying, modelling and mitigating "knowable" risks, but face a bigger challenge identifying, quantifying and mitigating more ambiguous ones, such as the ones that characterized the recent financial crisis. Accordingly, we believe that insurers require a strategic risk management (SRM) solution that identifies, assesses and economically manages potentially enterprise-threatening losses over time; in other words, SRM is a way to mitigate evolving risks before they spiral out of control.

Creating a strategic risk management solution for insurance businesses: PwC.

At least, in the quotes in this brief extract, there is certainly a "nod" towards a more Systems-based perspective i.e. one that recognises organisations as complex, non-linear, systems. But, it is one thing to be able to identify weaknesses in risk management across the Financial Sector and something altogether more challenging to develop and deploy the tools to "prevent a recurrence"…unless, of course, you have Ontonix in your corner!

Many enterprise risk functions do reasonably well identifying, modelling and mitigating more "knowable" risks such as some potential natural catastrophes, but they face a bigger challenge identifying, quantifying and mitigating more ambiguous threats that germinate as weak signals, such as financial crises. Based on our research and perspective many insurers did not have mechanisms in place to identify and track the weak signals of an impending financial crisis, and as a result they did not mitigate crisis risk prior to 2007. To prevent a recurrence of this experience, a more comprehensive risk management solution is required that specifically seeks to identify, track and mitigate potential inflection points [tipping point; bifurcation*].

According to former Intel CEO Andy Grove:

An inflection point occurs where the old strategic picture dissolves and gives way to the new, allowing the business to ascend to new heights. However, if you don’t navigate your way through an inflection point, you go through a peak and after the peak the business declines. It is around such inflection points that managers puzzle and observe, "Things are different. Something has changed."

* bifurcation: when a system switches from one stable state to another, minor fluctuations may play a crucial role in deciding the outcome

Inflection points often germinate as weak signals that go unnoticed because people either do not look for them, or because they discount or otherwise ignore them. This is unfortunate because many inflection points and resulting business failures are foreseeable, and therefore can be considered "predictable surprises" not "black swans."

This second quote follows on nicely and really "nails it", from a complexity perspective.

According to Professor Michael Roberto:

Organizational breakdowns and collapses do not occur in a flash; they evolve over time. They begin with a series of small problems, a chain of errors that often stretches back many months or even years. As time passes, the small problems balloon into larger ones [Butterfly Effect]. Mistakes tend to compound over time; one small error triggers another. Once set in motion, the chain of events can be stopped. However, the more time passes, and the more momentum that builds, once seemingly minor issues can spiral out of control.

Risk v Resilience(1)UNFORESEEN IS NOT UNFORESEEABLE: but ONLY with tools that enable the observer to identify, map, measure and monitor the number, nature and integrity of the interconnections upon which the organisation relies for its "survival".

Conventional risk management and risk rating tools and techniques that were sufficient for risks in the Industrial Era are, simply, woefully inadequate for the Digital Age. The “blindspots” in reports such as this, facilitate the growth of multiple “small problems” into systemic risk, adding to economic uncertainty and market volatility. 

"We have to avoid using yesterday’s solutions to address today’s risks”

David Cole, Chief Risk Officer, Swiss Re

“Both insurers and insurance intermediaries need to fundamentally rethink how risk is assessed”

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