Institutions & Insurance:: physician heal thyself…but do it quick!

English: Visual description of the different l...

English: Visual description of the different layers of complexity in system architecture (Photo credit: Wikipedia)

I have had the privilege of gaining an holistic view of the insurance industry and – armed with the tools that WOULD transform their businesses and our globally-shared future – have had the means to see beyond the symptoms about which the industry, other financial Institutions and Corporations are in denial…

It isn’t a pretty or healthy picture and the time to change is running-out!

As far as I can determine, we got to this point, primarily, because business leaders don’t know any better!

How could they when, at Business School, they learn what they are taught: knowledge is NOT understanding. And what they have learnt is economic theory that is based upon naive assumptions. Then, in commerce, are incentivised to pursue short-term results and to squeeze every last drop of profit, without conscience or consideration of the wider social and ecological consequences. It is what they see in practise on a day-to-day basis, are told by (equally ignorant) Consultants or read in the Management books of leaders from a less inter-connected era. They should be a dying breed but, instead are left to kill at will!

My own industry is in denial about the flawed, high leverage, high growth model, that failed banking but was ‘handed down’ to them (and globally across sectors, often as a condition of lending) by bankers: our ignorance of its flaws or inability to identify a viable alternative is merely accelerating the industry deeper into crisis.

Instead of changing direction, most are content with complaining loudly about increasing regulation, before, occasionally (and grudgingly), considering that there may be endogenous [internal] issues to be addressed. But, in the absence of an alternative strategy, blaming exogenous [external] factors and clinging to the forlorn hope that we survive current turbulence…then, having defended the status quo, returning to business as usual just like the ‘too big to fail’ masters of the universe! Sadly though (for the insurance industry), whilst banking and insurance may be inextricably linked, when it gets down to tough decisions we are the poor relations and, left to their own devices, “concentrating upon core activities” will be the order of the day. It will be sink or swim. Survival of the fittest or, in the case of the insurance industry, survival of the least unfit!

How do I know what I know and how can anyone else recognise the signs?

The array of visible symptoms can range from:  inflated self-image; arrogance; inability to trust (or be trusted); insatiable appetite for ambiguity; irrationally competitive/aggressive; high debt &/or growth demands; financial irregularities; abuse of workers and partners; unaddressed customer dissatisfaction issues; short-termism; increasing operational complexity; falling profitability…

The problem is the solution: don’t trust what you see until you see it for what it is…

Complexity: such dynamic (non-linear) organisations NEED internal controls (self-regulate), at least as complex as the internal processes (Ashby’s Law: The Law of Requisite variety) that enable function. Business people and the operations in which they are human component parts are under constant attack from a deadly man-made virus.

It attacks the part of the brain that regulates the intake of nutrients (liquidity and raw materials). Behaviour can become like that of an addict. The receptors of the immune system are fooled into replacing the process of cellular innovation and renewal [creative destruction: necessary for stability, agility & adaptability]. Mutant cells signal the ability for rapid, sustainable growth but are, instead, the source of a virulent strain of risk that attacks the internal structure, renders the host fragile and a carrier of systemic risk.

From extensive research, following episodic contagion amongst numerous other institutions [financial, political, religious, etc.] we now know that the symptoms are as a result of genetic mutations, that erode cell variety and adaptability during prolonged periods of relative economic stability. Instead of the innovation of creative destruction the mutation delivers destructive creation that leads to self-similarity in products, processes, structures and strategies [in biological terms inbreeding]. It CAN deliver a short term, but unsustainable, improvement in performance but the balance of vital nourishment is adversely affected, resulting in over production of business DNA, “rich” in  G, F & R [Greed; Fear; Ego], which erodes performance over time and, without radical intervention, leads to gradual failure or sudden collapse. . but,

Conventional treatments, developed in a past era to treat systems that were merely complicated [linear], are the equivalent of homeopathic remedies for complex systems i.e. they are without any sound scientific basis or based upon beliefs [economic, business and risk management] that have been shown to be incomplete, flawed and/or discredited.

Practitioners appear, mainly, as Academics and consultants [acolytes of dark arts  that are unproven or known to be flawed] but continue to promote their own branded treatments – often sponsored by organisms that act as super-spreaders of the very risks that need treatment! Failure to prevent the spread and a recurrence of symptoms in sufferers, are evidence that a new approach is urgently needed. The spiralling costs of treatments dictate that we are already passed the time for the cult dedicated to predicting the cause, nature, pace and impact of contagion MUST, finally admit that, due to the complexity of the systems, they SIMPLY CANNOT ACHIEVE THEIR GOAL.

Intervention, in the form of external regulation, intended to change behaviours and manage the impact upon society, required extensive infrastructure (more complexity) and spawned another breed of consultant, with all the associated costs. However, as the virus originates within individuals – spread and amplified through through feedback loops, social and economic interactions – if the root cause(s) remaining untreated, the virus continues to spread across the internal networks of business systems and sub-systems, into other systems and networks that they come in contact with. Digital, financial and supply chain networks serving as the conduit for the spread of systemic risk.

So, you may have read this and concluded that I am completely mad – I can assure you I am not. Although I will confess that, seeing the world of banking, insurance, regulation and risk management in a more colourful way, may take a stretch of the imagination for some but if it sheds light on a problem that touches every one of us, it has been a worthwhile exercise. It is better to have an understanding of systems, systemic risk, complexity and WHY business (irrespective of sector) is exposed to types of risks (financial and systemic risk) that they have not had to contend with before: are wholly ill-equipped to identify or prevent; are ill-prepared to influence, let alone manage….despite the best efforts of the snake oil salesmen with their highly polished sales pitches to persuade them (and us) otherwise.

The ‘Butterfly Effect’ NOT the bull in a china shop

In keeping with the nature of complex systems, untreated outbreaks at nano or micro scale can have serious implications at macro scale. If you still don’t believe me, cast your mind back (if you don’t already do so on a daily basis) to the impact of, such as, the virtual collapse of global banking, an Icelandic volcano, tsunamis, Sars or Avian flu outbreaks, the actions of a disgruntled Tunisian fruit-seller or of Gavrilo Princip in Sarajevo, etc, etc.

In such a highly inter-connected business world, with multiple risk sources and the prospect of split-second contagion, containment is virtually impossible.

The sheer pace, reach and complexity of the problem(s) render conventional wisdom, virtually, redundant. Like 16th Century medics treating cancer with leeches! Our knowledge has moved far beyond that of treating the visible symptoms of disease. Invention and innovation has seen us develop tools, such as X Rays, MRI’s or similar, that enable us to look within – without killing the patient! – provide a form of transparency that takes us closer to the roots of the problem. With that insight we gain a deeper knowledge that, if it does not always lead to cure, improves our understanding sufficient to (where possible) engage in prevention, through early identification and treatment to reduce the number of fatalities…and, at least, reduce the burden on over-worked leeches, reliance on witch doctors, a cow pat and frog spit poultice or late night call-outs for barber-cum-surgeons armed with an apron and a bottle of the strong stuff!

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