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!!!

Morally bankrupt culture:: Why I Am Leaving Goldman Sachs – NYTimes.com


A salutary lesson for every firm…particularly those within Financial Services (irrespective of scale).

Any “leader” who believes this is only about banks or bankers had better think again!

This is about the prevailing culture that they have presided-over, if not created. It may have enabled you to secure the wealth and power you so craved. But, if it is all that some of the newest, youngest, brightest recruits of the last 10 years have been fed and were/are too fearful to question, you can no longer deny that YOU have done your firm, these individuals, your clients (past and present), economies (local &/or global), future generations and, perhaps, the planet untold, perhaps irreparable, damage.

Unlike a Rating Agency my opinion is completely free! It is based upon both qualitative and quantitative data. Put as simply as possible, unless a financial organisation can offer a high level of transparency, sufficient to reassure its stakeholders and to (re)build TRUST it is not and cannot be deemed to be “investment grade”.

Financial Reform, courtesy of Basel and such like, should not come at the enormous expense that it does. Instead of spending increasing amounts on relentless lobbying it could be invested in “change” that stakeholders can see and believe in…TRANSFORMATION from the inside because you know and admit that it is the only way forward.

I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.

via Why I Am Leaving Goldman Sachs – NYTimes.com.

If you like a good conspiracy story I would urge you to read this piece about Martin Armstrong who was only released from jail last year:

Looking behind the curtain: If you like a good conspiracy theory…

Don’t forget that Goldman’s played their part on aiding the Greek Government bring the Euro to the brink of the abyss! I (like others) have had a go at Goldman Sachs on more than one occasion. Enjoy.

 

Risk Management: adding to uncertainty!


By the time that “conventional” risk management is considered relevant by many business owners, risk managers, insurers and banks the damage is already done!

That is bad news for the business owner and everyone, directly or indirectly, working with the business. It isn’t great news either for local and national economies that are reliant upon successful enterprises for their survival.

The paradox is that, this scenario is not necessarily bad for those involved in underwriting or managing the risks associated with financial or insurance “risk transfer”…and not just because they still get paid and can blame failures upon events that ‘could not’ be predicted (even when that is not the full story)…because, as long as  there remains a need [to transfer risk], there MAY be sufficient risk spread or separation, that, in the event of a loss event (that cascades or spreads, vertically and horizontally to/from the client), a major company SHOULD be able to absorb the impact. But this does not appear to be enough to ensure Compliance with further Regulation, whether Basel, GIAS or similar.

un(fore)seen is not the same as unforeseeable

Risk-v-Resilience1.pngI hope this infographic helps clarify the point.

…but we can certainly make them worse by attempting to do so! The complexity and inter-connectedness of business [fractal complex systems and networks] has transformed the nature of risk in the “Digital Age”.

Unmanaged complexity is a source of systemic “risk” and adds to ‘reducible’ uncertainty.

Before we are able to apply the tools of risk management – without adding to system complexity – we, first, need to extend the current “risk horizon” into uncertainty.

 

Reactive – Protection: Risk ManagementMRI-scan-415x587.jpg

Reflexively assessing risk [to enable compliance with legislation or regulations] is like prescribing treatment based upon observed symptoms and patient data of those with a similar profile, without identifying the root cause: or undertaking intricate surgery based upon an artists impression of the human anatomy!

Proactive – Prevention: Complexity Management

Tailoring treatment based upon a thorough examination of the patient – the equivalent of an MRI or PET scan [objective & quantitative] – observed at micro scale to treat at source: conduct micro surgery and monitor the health [resilience] of the patient, in real-time, whilst in theatre, ICU or for as long as is necessary.

Operational Risk: After MF Global, Risk Management Again Takes Centre Stage


I’m no banker (you must have misheard!) but the MF Global collapse only serves to illustrate how impotent Regulation and risk management for financial institutions really is!

The dramatic collapse of MF Global, the broker-dealer and clearing firm that was bankrupted by bad bets on European bonds, has sent financial services firms scurrying to make sure their risk management operations are up to the task, industry sources say. Even as much of Wall Street remains mired in a period of intense risk aversion in light of the European debt crisis and fragile U.S. economy, the demise of Jon Corzine’s company has most of the industry on red alert. Experts say the current risk management environment is a flashback to the period immediately following the collapse of Lehman Brothers in 2008, when the investment community realized how costly it can be to not fully understand counterparty risks.

via After MF Global, Risk Management Again Takes Center Stage – Advanced Trading.

The company may have been “…bankrupted by bad bets on European bonds” but how can that be when, quite apart from all the other rules and regulations, compliance with Basel requirements for OPERATIONAL RISK should provide a sound basis upon which to build… Read more of this post

Regulators v Barbarian hordes


As a franchise  Alien v Predator has obvious appeal. Unlike our title it actually sounds like a fair fight. One worth watching!

But pin-striped Barbarians atop elephants at the gates of Basel, London and Washington. How could you tell the combatants apart in hand-to-hand clashes? Well apart from the conspicuous mode of transport lack of conscience and the sharp suits. But Holly wood blockbuster? I think not…Art of War “yes”, FSA Handbook “no chance”.

Rome 

Image by Trois Têtes (TT) via Flickr

In his excellent article in this weeks Financial Times, (Barbarians at the gates of complexity) Prof John Kay, succinctly and effectively makes the point that the lessons from history are there to be learnt.

THERE IS A CONSIDERABLE BODY OF QUALITATIVE EVIDENCE TO SUGGEST THAT A “SYSTEM” CAN SUPPORT A FINITE AMOUNT OF COMPLEXITY. WITH SUITABLE DATA WE,  AT ONTONIX, ARE ABLE TO PROVIDE THE QUANTITATIVE VERIFICATION AND TO MEASURE BOTH CURRENT AND CRITICAL LEVELS WITHIN THAT SYSTEM…NOW THAT’S WHAT I CALL PROGRESS!

Please follow click these links for more Complexity Facts from Ontonix.

“…complexity breeds complexity, and is subject to diminishing  returns. Eventually the costs of increased complexity exceed the benefits” Prof John Kay

I would like to pose the question:

If the Barbarians of Financial Services have had the books but didn’t bother to read them what will be achieved by the introduction of more regulation?

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