Insurance Industry:: Innovation, transformation or failure

If you have visited my blog before you will already know that I have spent some considerable time researching and commenting upon a wide of topics that, although many within insurance fail to see the connection, are related directly related to the insurance industry.

In truth, my work was initially prompted by concerns (a deep dissatisfaction may be more appropriate!) about how the insurance (particularly broking) operated: structure; culture; regulation; remuneration levels; use of IT; cover; pricing of RISK. It was only as I delved deeper into the subject matter, a form of ‘root cause analysis’ [RCA] – causality being particularly pertinent to insurance! – that I came to fully appreciate HOW DANGEROUSLY LIMITED the understanding and application of a probability-based assessment of risk truly was. Especially when the business environment has, fundamentally and irrevocably, changed.

If a future event will take place, it will do so irrespective of the probability that we may have attached to it. If an extremely  unlikely event will happen, it’s probability of occurrence is already 100%

Having been introduced to Complexity (by Dr Jacek Marczyk, Founder of Ontonix srl) and it’s relationship to risk and uncertainty my RCA led me to investigate from a (more rigorous) scientific and mathematical perspective. Eventually into the realm of the behaviour of Complex Systems and, inevitably, to Systems Thinking. Gradually, the understanding, that comes from viewing life and work through the Systems lens, revealed that much of what is wrong with Financial Services stems from unnatural interventions.

neural plasticityThis is to say that, with the understanding of how the most resilient systems (i.e. found in nature) are structured, operate and evolve, we now KNOW that, the ability to survive in the Digital Age is impaired by the man-made [linear; hierarchical] structures and techniques we created to manage the complicated [NOT complex] machines and processes of the Industrial Revolution. We know that growth is finite [unsustainable] yet we strive to perpetuate it. network_Movie

The evolution of these, once complicated systems, to the highly complex that we now rely upon, is readily overlooked by the casual observer. But for systems to survive in the, inter-connected, Digital Age (or in a post-critical landscape), adapt they must. IT IS THAT FAILURE TO ADAPT, OR THE UNINTENDED CONSEQUENCES OF ILL-INFORMED MANAGEMENT, THAT BROUGHT Complexity to casualtyABOUT THE DISAPPEARANCE OR TERMINAL DECLINE OF, ONCE FAMOUS NAMES SUCH AS, WOOLWORTHS, COMET, BORDERS, KODAK, JESSOPS, HMV, BLOCKBUSTER. The price of failing to respond to ‘signals’ from the external environment can be very high.

in modernity, we have come to rely upon highly complex inter-connected systems, whether digital, financial or social. But, instead of LEARNING ‘lessons from nature’ and applying that knowledge to build resilient business systems ‘in their image’, conventional wisdom is accelerating us toward a tipping point that we are not prepared for. As has been seen at various stages in our history, the ‘wilful blindness’ to new patterns, of leaders has led to the failure or collapse of complex social systems e.g. Roman, Mayan. Mesopotamian Empires, Easter Island. The price of reliance upon what is known (risk), because it has been seen before and underestimating uncertainty – the unknown.

Joseph Tainter wrote a chilling book called The Collapse of Complex Societies

“When the value of complexity turns negative, a society plagued by an inability to react remains as complex as ever, right up to the moment where it becomes suddenly and dramatically simpler, which is to say right up to the moment of collapse. Collapse is simply the last remaining method of simplification.”

Yet, in modern business, still we waste valuable and (in some instances) scarce resources, treating symptoms – without knowing what the unintended consequences are – rather than the root cause of a problem, predominantly, of our own making! To make matters worse we use financial metrics, such as those of GAAP, to compare performance against the past, peers or projections. This tells us nothing of the fitness (robustness) of the system and, at best, provide false positives.

There are a lot of “quacks” willing to peddle their own particular brand of cure for the ills of a business. Without sound basis, these ‘professionals’ are little more than snake-oil salespeople! But they now form sizeable and influential networks of advisors and consultants whose own survival is closely-coupled to the perceived need for their patients to receive ongoing treatment. If they cannot, objectively, measure the health of the system, given what you have read already, do you have a sound basis to trust their judgement?

”Imagine assessing the robustness of the electricity grid with data on power stations but not on the power lines connecting them”

There can be no excuse for a failure to act. Nor can there be for acting in a manner that adds excessive complexity, thus increasing risk and impairing resilience. Our ability to observe the behaviours of social, financial, digital systems, study global weather or anatomy (at molecular scale), track and treat the spread of a virus illustrate much of what we need to know about sources of endogenous risk and their spread [contagion]: systemic risk.

The most ‘disturbing’ revelations from my research – that has become more of a mission – have been the recurring pattern (risk) of blind faith in conventional wisdom.

You must not become complacent with a pattern that works today because new patterns will be needed in the very near future

EVEN when presented with the irrefutable evidence, in the form of past failures, examples from other industries, superseded or flawed theories and/or practices,  reactions tend to start with feigned deafness or blindness, followed by denial or attempts to discredit and marginalise then, ignore…and file under “inconvenient truths”!!! This is not only my experience.

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

Upton Sinclair

Most right-minded people would be entitled to wonder, when there is scope to seize a competitive advantage by embracing “new thinking”, “why” such valuable information about/from the environment that sustains them, would be treated in such a manner.

“The illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn.”

Alvin Toffler

Leaders’, whose ability to adapt their organisation and to deliver innovative products and services – to better serve their customers’ needs/demands (particularly in such turbulent and unpredictable times) – stand to be survivors (according to Darwin!), if not long term ‘winners’.

Current institutional arrangements, including the lack of incentives for the private sector to innovate for sustainability, and the lags inherent in the path dependent nature of innovation, contribute to lock-in, as does our incapacity to easily grasp the interactions implicit in complex problems, referred to here as the ingenuity gap.

Thomas Homer-Dixon

OK, having painted a, pretty detailed, backdrop, that effectively covers the last 5/6 years, it’s about time that I returned to the subject of firms directly and indirectly involved in RISK TRANSFER.

Insurance & Banking: in crisis and in denial…but indifferent because WE PAY

Although I know little of the inner workings of banks – except through the lens of Complexity, Systems Thinking et al – my understanding of the root causes are sufficient that, whilst the following is aimed at the insurance industry (whose model is an adapted version of the failed banking model) the lessons can be applied across wider financial services and into the businesses to which banks and insurers convey an unseen, unmeasured, risk using financial and digital networks as their conduit.

The FINANCIAL SECTOR has evolved from ‘independent’ pillars of resilience to become, inter-connected, creators and super-spreaders of systemic risk.

RCN and GRC productIf the phrase “Practice without sound theory will not scale” has any validity (and I, for one am sure it has), then it might be beneficial to explain why the modular product framework I have created is built upon theories that are current AND sound.

Firstly, if you aren’t already familiar with the terms Panarchy or Panarchic Cycle this graphic may help with some initial understanding. For me, whilst you would be entitled to ask “what has this got to do with insurance?,” this has to the starting point as it is the cycle identified (across scales – fractal) in Nature. I don’t just mean in ecology – UPON WHICH WE ARE ALL RELIANT – but within our own biological systems and the systems of the rest of the animal Kingdom.

Panarchic cycle (large)It is the fractal, interdependent, structure of networks and systems of sub-systems and processes that facilitates the effective information-flow that gives these systems their inherent resilience and underpins the vast array of functions each performs, often without conscious thought – self-organising and self-regulating.

Of course there are other aspects where “conventional wisdom”, that was ‘honed’ during the latter years of the Industrial Era that have failed or have been shown to be flawed and, as such, have become sources of risk in the Digital Age.

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?


Why rate RISK on [subjective; probability-based; reflexive] predictions of the unpredictable, when it is the business systems’ RESILIENCE: ability to absorb the impact of possible and probable future events, that can be [objectively] measured, monitored, ‘scenario-tested’, rated and managed (if necessary in real-time), that will determine the extent of any resultant loss?

The following table identifies SOME of the fundamental issues that the insurance industry needs to address.

I have already started the process and, together with some equally committed individuals from a wide range of disciplines and politics – the common denominator being our involvement with, exposure to &/or grave concerns for customers of the insurance industry – we have formed an Executive Leadership Group and several industry specific, not-for-profit, groups to benefit from the kind of insurance products and services that deliver upon the implied (and all too often unfulfilled) insurance promise.

Industrial Era: conventional wisdom

Digital Age:

current knowledge

Classical Economic Theory (single equilibrium) Complexity Economics (dynamic)
Corporate Community
Shareholder (£/model) Stakeholder (customer/£)
Linear (Industrial/Man-made) Non-linear (Digital/Natural)
Hierarchy (rigid: people & process) Distributed – a Wirearchy (self-organised: information & knowledge)
Centralised (top down) De-centralised (network)
Interconnected Interdependent
Competition Collaboration
Supply Chain Ecosystem
Destructive Creation Creative Destruction
Growth Survival
Transaction Relationship
Risk Rating Resilience Rating
Data Conventional wisdom (instinct/heuristics) Information (measurable/verifiable/repeatable)
Correlation (statistics) Causal Relationships (interdependencies & interactions)
Reactive (reflexive) Proactive (real-time)
Risk (probability) Uncertainty & Complexity (possible and plausible)
Risk Model (prediction) Resilience Measurement (model-free)
Risk Management Resilience Management
Systemic Risk Systemic Resilience
Regulated Self-Regulating
Low Cost – Price (quantity) High Standard – Value (quality)
Revenue Profit
Ambiguity Transparency
Culture (Greed/me) Values (Shared/we)
Prescriptive Collaborative
Sales (push) Service (pull)
Short term (results) Long term (Sustainability)
Distrust (Reputational Damage) Trust (Peace of Mind)

Complexity is a measure of the total amount of structured information (measured in bits) that is contained within a system and reflects many of its fundamental properties, such as:

  • Potential – the ability to evolve, survive
  • Functionality – the set of distinct functions the system is able to perform
  • Robustness – the ability to function correctly in the presence of endogenous/exogenous uncertainties

In biology, the above can be combined in one single property known as fitness.

The ‘bad’ news for the Financial Sector is that the future is about survival of the FITTEST…society can no longer tolerate business done on the basis of survival of the greediest (or fattest).

In Nature there is no scope for “too big to fail”.

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3 Responses to Insurance Industry:: Innovation, transformation or failure

  1. I have used this quote, from Clay Shirky, on several occasions to TRY to get the message across the the insurance industry “It is easier to understand competition than obsolescence”. But, apparently, the industry can’t/wont learn lessons from other sectors…perhaps until it is too late (if it isn’t already)!

    The required agility to adapt my already be lost because of the close-coupling with a supply chain that strips value BUT, if an organisation/industry is too inward-looking (content with familiar patterns), then the ability to learn from other sectors – EXAPTATION – compounds the problem

    This article spells it out, again…

    Disruption is occurring everywhere: retail, the labour markets, telecommunications, marketing. The bigger they are, the harder they fall.

    Forward looking, the transition from one paradigm to the next may not be so obvious, especially when burdened with inertia from legacy businesses, however in hindsight it’s usually quite obvious.

  2. Pingback: How do we get to WE? « quantum shifting

  3. Flawed Economics – My article from 2010:

    “Classical” economic theory is based upon concepts such as rational decisions and stable equilibrium whereas, unless I am making a complete idiot of myself, REAL economic systems do not achieve “static equilibrium” and are inherently unstable. As for rational…I’ll leave you to make up your own mind!”

    New Paper 2013: In this paper we argue that if we want to find a more satisfactory approach to tackling the major socio-economic problems we are facing, we need to thoroughly rethink the basic assumptions of macroeconomics and financial theory. Making minor modifications to the standard models to remove “imperfections” is not enough, the whole framework needs to be revisited.

    Dirk Helbing and Alan Kirman: Rethinking Economics Using Complexity Theory

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