Insurance, risk & underwriting:: out of the coffee shop and into the light


Underwriting next level Wow! This is a great report from a US firm called Strategy Meets Action and I think that Deb Smallwood has spelled-out a way forward for insurers, MGA’s and brokers who are dithering on what they need to do be “win” in the immediate future and in the longer term, no matter how the landscape changes in coming years.

Don’t get me wrong, whilst the report makes sense of so much that can (does) cloud the mind of insurance executives – who have so many strategic issues to address and an abiding fear of making the wrong call – it doesn’t enlighten them as to “how” they tackle some fundamental failings, such as:

  • how to differentiate between risks that “look good”, according to correlations in data gathered over many years and those that ARE good, based upon a reliable measurement of their current resilience [ability to absorb unforeseen events]
  • how to rate risks for which there is little or no historic data [the truly “new” venture]
  • how to develop and maintain a sensory awareness of, rapidly changing, internal/external factors – threats and opportunities

Real-time visibility is, undoubtedly, a huge advantage in the Digital Age but, that does pre-suppose that the capability to analyse large scale data [Big Data is THE hot topic] exists. But an even more important question is…

…how do you recognise something you haven’t seen before?

That is to say if it is a familiar pattern i.e. risk, something “known”. But hold on a minute, if this is the full extent of what the smart, enabled and aligned, insurer is looking for then that is to fail to recognise that there are “unknowns”. Do we assume that something unfamiliar is irrelevant, an outlier, or investigate to ensure it is not a new, emergent, pattern or risk?

If real-time means instant communications and high frequency trading across the globe, by the time a risk has been sensed it will probably be too late to respond – the pace of the virtual collapse of global banking, financial impact and spread of the Japanese Tsunami serve as recent evidence. This is the downside of the pace of modern, inter-connected, global business.

This ISN’T much use when trying to cultivate a culture and deploy the resource for “more effective loss prediction and prevention”.

So, can we only learn our lessons (if we really do!) by experiencing, measuring and analysing any resultant loss? Hope that we get lucky…is that really as smart as we get???

Simple answer is “no”. But the correct answer is “it may as well be, because, until the industry recognises the limitations of its present perspective and embraces tools that enable it to extend the current risk horizon it will lack the requisite variety to meet the needs of its shareholders and customers”

For insurance, banking and risk professionals to still talk about risk, the ability to manage or model risk and to build a risk culture, in the Digital Age shows, either unbelievable ignorance of their subject matter or a dangerous arrogance. I was happy to describe the arrogance as inexplicable until, some time ago, I stumbled upon a quotation from the late, Upton Sinclair

It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”  

Hopefully this infographic will illustrate what I mean when I refer (above) to extending the risk horizon as a means of gaining insights beyond the “narrow risk perspective”:

imageWe continue to be limited by our own knowledge, thus, invite disaster. We prefer faux certainty (a projection of the future based upon our past) to the reality of uncertainty and, as a result, when disaster strikes, we are prone to “label” what was unforeseen as unforeseeable…that suggests that we have looked but did not see! When, too often, the truth is that we didn’t look but assumed. Or “overlooked” by failing to utilise the tools available to us.

WEALTH WARNING: all risk management is not made equal and it should not be solely about risk…but reward!

Black Swan resilienceA number of reports on the subjects of risk management, complexity and compliance can be found here.

Of the recognised Consultancy firms it certainly appears that AT Kearney have the best understanding of the subject of complexity but, unlike Ontonix, NONE, to date, have presented a, measurable, definition or means by which an organisation can begin to explore the issue themselves.

Proactive NOT Reactive: the unique brand of “Advanced Risk Management” practised by Ontonix does not become active only once risk is recognised from within the organisation [outcomes]…by that time the damage may have been done, or opportunity missed. Nor does the business owner/risk manager need to rely upon legislation or regulation to direct a firm to areas of risk requiring compliance. Compliance and resilience are very different!

Objective NOT Subjective: our [model free] technology and expertise, have been successfully deployed, globally, across business sectors. Viewing an organisation as a dynamic [living] system enables us to adopt a rigorous, scientific approach that has proven as effective with biological systems as it has with highly complex man-made systems (including Aerospace & Air Traffic Control at a major European Airport). Objective and quantitative.image

Subjective Interpretation of quantitative and qualitative information is as reliable as an over-priced opinion!

Interdependent NOT Independent:complex systems are composed of a multiplicity of things; made up of a large number of “agents” (entities, components, or parts)  – without a single equilibrium.

Interdependent agents act differently to independent agents and to assess the stability of the system an holistic view [of the system] is required.

Whilst we now have the ability to capture vast quantities of data, without new tools and techniques with which to conduct analyses, we are limited by the extent of our knowledge i.e. how can we recognise a “pattern” [correlation] that we haven’t seen before? Characterised by feedbacks, causal openness, causal synergy (interactivity), disproportionality of cause and effect (i.e., nonlinear behaviour), and contingency identifies statistical correlation as a source of, potentially, dangerous assumptions…

Causality NOT Correlation: using system generated data, according to the Accounting and Management parameters utilised by the organisation (examples per infographic), we conduct analyses to identify and map the “hidden structure” of the information flow within the system: data may be sufficient for GAAP and to identify statistical correlations but EACH PIECE OF DATA IS AN AUTONOMOUS INFORMATION AGENT i.e. it contains vital information about the system in a similar manner as a human hair carries the DNA of its owner.

Unknown (or Unseen) NOT Unknowable: a human hair or a spec of blood are visible but, unless our visual spectrum (less than 1% of the electro-magnetic spectrum!) is supplemented by tools and techniques that enable [endogenous] examination at an appropriate scale, we can’t see DNA or cancer cells! Medical research and innovation have made known what was, once, unknown. But, no matter how hard we look we cannot know (until it’s too late) if/when we may be hit by a car, bitten by a deadly snake or similar [exogenous] event – the unknowable. A visual examination can reveal very little but, more importantly, can prove to be dangerously misleading. This knowledge is particularly useful to an individual or business intent upon using marketing, manipulation (financial or otherwise) and misinformation to present themselves as something they are not!

We now know about the “fractal nature” of systems and how much there is to be learnt by examination at different scales (from macro to micro and nano) and, courtesy of Ontonix, have the tools to do so, we have the means to: make the unseen, seen; the unforeseen, foreseeable; and to build resilience to the unforeseeable. Our unique technology “extracts” and analyses the information to reveal SOURCES of excessive complexity [weakness] and resilience [strength] NOT to wait until that affect the ability and effectiveness of the system to perform the functions for which it was designed.

…to overcome the organizational silos that have hampered visibility across the business, sometimes letting small problems become big ones, companies are focusing on the integration of risk data and management across functions. In response to past governance inadequacies and risk management’s traditionally low profile and lack of influence, companies are increasingly establishing C-level risk executives, often with a direct reporting relationship to the CEO and with more direct involvement in decision-making processes. And in the face of an increasingly complex business and operational environment for which many companies have been woefully unprepared, they are improving the sophistication of the systems they use to measure and analyse risk.

Most important, our global research has found evidence of the more effective execution of advanced risk management capabilities among a subset of companies participating in the Accenture survey. We call these companies, roughly 10 percent of all respondents, “Risk Masters.”

These companies are protecting themselves better in the short term by taking a longer-term perspective. They see the risk management function as a proactive enabler of investment opportunities. They are significantly more likely to consider risk management something that creates shareholder value, and they are especially adept at creating processes and mechanisms that link risk to business performance. The Masters are making clear that there is untapped business value in getting risk management right.

via The Risk Masters – Risk management – Accenture Outlook.

3 Responses to Insurance, risk & underwriting:: out of the coffee shop and into the light

  1. When I initially commented I clicked the “Notify me when new comments are added” checkbox and now each
    time a comment is added I get three emails with the same comment.
    Is there any way you can remove me from that service? Thank you!

    • Not sure how that happened but I will see what (if anything) I can do to correct that. Thanks for your interest.

      David

  2. Asking questions are genuinely pleasant thing if you
    are not understanding something entirely, except this paragraph offers good understanding even.

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