Schumpeter, interrupted:: the impact of “destructive creation”

Euskara: Joseph Schumpeter ekonomialaria

Euskara: Joseph Schumpeter ekonomialaria (Photo credit: Wikipedia)

I wrote a couple of articles last year, citing the lack of creative destruction in UK Finance and Insurance as a problem, so it is very interesting to read this article. Also good to know that the trend for non-conventional thinking is flourishing at Bank of England.

destructive creation: the type of self-serving innovation intended to improve [short term] returns at the expense of or with out benefit to the customer.

I use the term “unconventional” but, when reading this paragraph, I was reminded of Gresham’s Law. Further food for thought perhaps…

If this is true, it suggests that the economy is suffering from a failure to innovate. Joseph Schumpeter, the granddaddy of innovation economics, first described the innovative process of one of creative destruction, of good ideas driving bad ones to the wall and of capital being reallocated, often rapidly and disruptively, from the old to the new. Broadbent’s analysis suggests that we need more of this if the economy is to recover.

via Schumpeter, interrupted. – Nesta.

Spot the difference for underwriters

This is an aerial view of main location of the risk to be insured: Generic plc.

Company activities at and associated to the premises include: Property Owners; Manufacturing (incl. use of heat & work at height); Assembly (incl. clean room); Warehousing; Import/Export (loading/unloading – incl. quayside); Plant Owner/Operators; Wholesale; Distribution; R&D; Design: IT (mainframe); Admin./Accounts; Training, etc.

For the purposes of the task, let us assume that they are 2, competing, risks both with identical processes, sums insured, limits with similar EML’s, operational structure, growth history, financial performance, global customer/supplier footprint, credit profile, risk management and claims experience. The type of enterprises that are within the target range of risks that you are charged with securing in a competitive market place.

However, one of the risks is, significantly (measurably), more resilient than the other…sufficiently so that it could provide you with the competitive advantage required to secure the account. So, as an insurance, credit or financial risk underwriter:

Q. How do you identify and differentiate between the good and bad risk, providing a verifiable basis for an underwriting decision that enables you to win the business? Read more of this post

Airmic:: ‘Black Swan’ events – avoiding extinction

Practical advice, courtesy of AIRMIC & Marsh. The article is well worth a read even though all it really does is reiterate some of the key points I have been putting across since I started my original blog in 2009!

I have selected this extract as it identifies a huge failing that “stalks” the whole financial and risk sector but about which too few are prepared (or able) to be honest and many are even less forthcoming about its impact: ASSUMPTION.

The truth is that, without a healthy dose of assumption, the basis for flawed economic theory, mathematics that is as misleading as it is elegant and the computing power to turn it all into plausible financial models, they would not find it so, relatively, straightforward to relieve the populous (directly or indirectly) of our hard earned cash to enable them to wield – and abuse – the power that it brings!

Read more of this post

Dilbert does Credit Agencies & Capitalism


Ontonix: "Optimal does NOT mean best"

Nowadays it is very popular to seek optimal solutions to a broad spectrum of problems: portfolios,  engineering systems, strategies, traffic systems, distribution channels, networks, policies, etc. But have you ever wondered if optimal really means best? Well, it does not. Optimality is not the most convenient state in which to function. The reason?

Optimal solutions are inherently fragile.

Our economy (but not only) is fragile because everything we do is focused on maximizing something (profits,  performance, success) while minimizing something else (risk, time, investment, R&D) at the same time. This leads to strains within the system. Everything is stretched to the limit (or as much as physics will allow). This is exactly what one should not do when facing turbulence. The focus should, instead, be on:

  • Solutions that are fit, not optimal.
  • Simplifying business models and strategies.
  • Accepting compromises not seeking perfection. Improve, don’t optimise.


Read the full article: Ontonix – Complex Systems Management, Business Risk Management.