Insurance – the 7 principles that make it ‘work’


As someone with (too) many years in the insurance industry under my belt I have called ‘insurance experts’ a lot of things but never described them as this ‘simple’ explanation of the industry does…

Insurance experts are just hopeless romantics.

Large numbers are necessary in order for insurance companies to be able to calculate risk and work out the cost of providing insurance.

The bread and butter of insurance companies is statistics. Statistics is the tool that tells insurance providers what the chances are something will happen. If you have a large number of clients you can use the “law of large numbers” which states that if you have a large enough number of exposure units you can expect them to behave as the population in general does

via Insurance – The 7 Principles That Make it Work | Career, Business management, Leadership, Entrepreneurship….

I previously wrote about the flaw of large numbers in an effort to highlight that, whilst it may have been a reasonable to make assumptions re individual risks the same ‘simple’ approach cannot be applied when dealing with inter-connected risks. It is also worth noting that concatenated probabilities can be extremely misleading…what about possible and plausible events? And that the implicit assumption is that calculations based upon such limited (incomplete) data infer that the future will be similar to the past!

“Connected systems that we thought mitigate risk are actually concentrating risk, and these are risks that we do not fully understand yet”

Steve Wilson, CRO General Insurance, Zurich

Surely, even if we do not fully understand ‘systemic risk’ a prudent stance would be to proceed with caution…instead of the powerful insurance lobby putting up arguments against insurers being of “systemic importance“. Gimme a break!!!

Resilience:: foundation for a sustainable model

 

Please feel free to respond to the following…

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?

 

 

2 Responses to Insurance – the 7 principles that make it ‘work’

  1. Richard Ziert says:

    I feel your foundation is shakey – Nowhere in any of your charts or otherwise in you article do you mention that Insurance Is a Social Devise developed to protect the public as well as the insured

    • Hi Richard,
      Thanks for taking the time to stop by and for your your comment. However, I beg to differ! I am still seeking the person who can present a convincing argument for a rating basis based upon statistical analysis of an incomplete, reflexive, view of past outcomes.

      Spot the difference for underwriters [http://wp.me/p16h8c-1jv]

      I wonder how many members of the commercial insurance-buying public would prefer (and embrace) a rating system based upon the actual, current, resilience of the business for which they are purchasing protection? Would they be convinced of the ability of Risk Management to operate pro-actively and to deliver prevention if they understood the scope for flaws in theories underpinning current basis?

      David

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