Insurance – the 7 principles that make it ‘work’
Sunday, 7 July, 2013 2 Comments
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
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!
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!!!
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?