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.

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Insurance & Reinsurance…as simple as “A, B, C” but much more dangerous!


Apparently my (lone) voice isn’t sufficient to alert the UK financial & insurance industry to the folly of their perspective on “risk”! So, I am eternally grateful to Tim Harford for this presentation!

PLEASE watch this and don’t make the mistake of thinking that the “problem” relates only to Oil disasters, Financial or Nuclear meltdowns. The lesson is that, if the means of communicating INFORMATION, quickly and effectively, between business units, is impaired in complex systems (and that includes relatively small businesses), events WILL happen faster than you or “the system” can react and can have HUGE, unforeseen [not unforeseeable] consequences. This is the nature of the world as we now know it.

Complexity & Close-coupling cause losses!!!

This should be required viewing for every underwriter, risk manager, insurance company executive, banker and regulator…except that many of them already KNOW precisely how risk cascades and spreads. I am constantly amazed how many learned people, in finance and insurance, who  talk about “contagion” and “systemic risk” as if it is something that they don’t have to worry about! THE PROBLEM IS, THEY DON’T KNOW HOW TO ADDRESS THE PROBLEM, SO HAVE FILED IT UNDER “INCONVENIENT TRUTH”, waiting for the time when the shit hits the fan (again) so they can try to convince us that failure was unforeseeable – a Black Swan event – they don’t want to have to admit how little they know about causality, preferring instead to rely upon historic risk data…as if our industrial past holds all the answers we need in our extremely complex, inter-connected, Digital present and future.

Tim talks in great detail about the failures that led to the loss of 167 lives on the Piper Alpha Oil rig and how the sheer volume of data means we can miss vital INFORMATION that could serve as a means of crisis anticipation.

Now, if you have read any of my previous blogs about complexity and risk, you will know that just because “they” say they don’t know what the answer to problem is, doesn’t mean that there is no answer.

BECAUSE THERE IS! This is why I was so excited by what Ontonix, under the inspirational leadership of Dr Jacek Marczyk, had developed and why I keep going on about it DESPITE the enormous challenge of cracking “institutional inertia”.

I would like to highlight a previous article from 2010: Does complexity guarantee “system failure”?

NOT because I am not trying to claim to be so far ahead of the curve here BUT to try to illustrate that the knowledge is out there but too many people who have the power to do something about it AREN’T…go figure!!!

Financial Services thrives on trust – oh dear!:: Edelman Trust Barometer 2012


More inconvenient truths for the insurance and banking sector! If it weren’t for the fact that, ultimately, WE FUND the marketing they need to portray themselves, their products and services as something they are not, I would love the delicious irony of an industry that SPENDS such outrageous amounts trying to SELL to us instead of INVESTING to make their marketing promises more of a reality, restore damaged reputations, offer greater value and make their employees roles more fulfilling!

Essentially this means that we pay a high premium, so an industry, [guilty of perpetrating “licensed fraud” such as PPI mis-selling] that we don’t trust, can continue to misrepresent itself and misinform us in an effort to obtain our hard-earned, tax paid, cash.

Does this constitute a win/lose relationship, or what!!?

They have become dependent upon our inertia and misguided belief that Politicians/Regulators will make things “better”. The lack of credible alternatives serves them well, as it maintains the income needed to sustain models that are crippled by the complexity they have created to, so efficiently, strip customer value for themselves.

The full presentation makes for interesting/worrying/challenging (delete as appropriate) reading, as does the Executive Summary (click on infographic) and but before tackling that, here is a little “teaser”.

image

So, what are the messages that the genuine leaders of tomorrow can take from research such as this?

If you have what it takes you really shouldn’t need me to spell it out BUT here are a few clues:

expertise required (not salespeople)

referrals and recommendation (not sales)

business culture is critical

respect your “human capital”, and…

…give your employees a voice (with the means to communicate freely)

inertia isn’t the same as loyalty

Institutions and their leadership MUST CHANGE to (re)build trust

Of course there are other, less obvious, lessons to learn and it is one thing identifying the problems, another to tailor solutions to a particular business…but, if the process starts with recognition of the issues and a genuine desire to change, it is eminently “do-able”.

In a volatile and uncertain economy effecting change may be the difference between survival and extinction.  Innovators and “early adopters” will be the one’s to seize and retain competitive advantage.  

FINANCIAL SECTOR LEAST TRUSTED

Complexity underpins the top business continuity issues for 2013


The failings &/or shortcomings of conventional risk management are known but still it’s acolytes continue to peddle their wares and ignore the inconvenient truth…

Complexity is a recognised source of risk that their tools and techniques CANNOT identify or address…but, if the understanding of the issues is growing amongst Risk Managers, surely, it can only be a matter of time before the ‘power’ of Ontonix tools becomes fully appreciated.

“…the risks we all face as we go into 2013 are much more complex, and thus much more difficult to counter,” says Michael Davies, CEO of ContinuitySA, Africa’s leading provider of business continuity services.

In what has become an annual exercise, Davies and members of his executive team met late in 2012 to review their predictions for the year and ponder what the coming year might hold for risk managers.

“What became very clear is it has become almost impossible to consider individual risks without taking the overall risk into consideration,” Davies observes. “Globalisation and the profound connectedness between individuals, companies and countries promoted by technology means that risk, too, must be seen broadly.”

Bearing this observation in mind, Davies and the ContinuitySA team have identified the following set of six interrelated risks for 2013….

Complexity underpins the top business continuity issues for 2013 | ITWeb.

Unintended consequences:: who’s kidding who?


A parable from the 19th Century that the insurance industry would do well to remember as it (directly and indirectly) presides over a ‘system’ whose man-made complexity – created to strip value from its customers/suppliers in order to sustain its own, spiralling and unregulated, greed – is the biggest single threat to its survival own.

PLEASE follow the links (below) in relation to opportunity costs and …unintended consequences for further explanation. Both are economically significant, yet, apparently, too readily overlooked by acolytes of Irresponsible Capitalism. Yet another entry for the bulging category of inconvenient truths to be swept under the proverbial Corporate carpet!

Opportunity costs: refers to efficient use of resources (does the term ‘peak oil’ mean anything to you!?)

“Anyone who believes in indefinite growth on a physically finite planet is either mad, or an economist.”

-David Attenborough

Law of unintended consequences: is particularly relevant to those of us with an ‘interest’ in complex systems, risk, complexity and resilience. For, although recognised in the days of Adam Smith and the Scottish Enlightenment, it is too readily overlooked. Now that’s bad enough BUT, when you recognise what we now know about dynamic, non-linear, business [digital] systems, IT IS CRIMINAL! As is the ongoing practise of teaching economic theory that is known to be flawed!!!

…the consequences of policies will depend critically on the nature of the interdependences

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