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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How Crises Model the Modern World

Crises are our new reality. “Black swans” are increasingly becoming the norm; our systems, environments, contexts are structurally prone to crises. Doing more of the same will not be the appropriate way to deal with modern crises: a paradigm shift is needed, based on a more accurate understanding of the dynamics of complex systems. This paper is an invitation to change the theoretical vision of crisis and crisis management, and the education and training of all actors involved.

Global Crises… is a paper that could, very easily, have ended up as an exercise in mental masturbation BUT it is so much more than that. Read it and you will learn!

In physics, the Lyapunov theorem on stability of systems states that “In the vicinity of its equilibrium points, the solutions of a non-linear system are similar to the ones of the equivalent linear system”. This means that as long as your system is near its equilibrium point, you can use the techniques usually used for linear systems to get answers on the behaviour of the non-linear system. It is a non trivial theorem that can explain why techniques in risk and crisis management could still be used quite effectively during the previous decade or so, even though complexity had already become increasingly apparent.

However, the need, in the current framework of crisis management, for adding more and more
parameters to describe the behaviour of the system should have been a clear indication that something had changed. One cannot hope to describe a nonlinear dynamic system with a patchwork of simple parameters.

A non-linear system implies, in most cases, unpredictable behaviour, such as the inversion of the Earth’s magnetic field in physics. We must now prepare for the unexpected, and not predict the predictable. We must be more creative, learn to be surprised, and to act rationally and creatively during the phase of ignorance, information surge and shock.

Risk:: some things just CANNOT be modelled

Believe it or not this is only an extract from a longer article by the Founder of Ontonix. I am, very much a layman when it comes to computer models but that is most certainly not the case with Jacek (Marczyk). However, even I know enough to question, what I have come to refer to as, the “prediction addiction”  that afflicts the insurance and wider financial sector.

There is a fundamental principle – the Principle of Incompatibility – which states that as complexity increases, precision and relevance become mutually exclusive. In other words, as things get complex (and they seem to be) your statements about it become less and less precise. This means that as something becomes highly complex you can forget building models. You need to change strategy. A new approach is needed. You must change direction. Large consulting firms claim otherwise. Read more of this post

Edge:: Reinventing Society In The Wake Of Big Data is one of, if not, THE go-to place for insights from great modern thinkers across a range of subjects. Multi-disciplinary is now, increasingly, the way of things in Academia and in business too. Generalists appear to be in the ascendancy as the limitations of the narrow views of, past, over-specialisation and benefits of recognising the universalities of [non-linear] complex systems have become more apparent through examination using the tools that technological innovation have given us.

I had intended to only include one or two extracts from this conversation but I was so inspired I got carried away! Nevertheless I would urge you to follow the link (below) to read the full text and view the interview. Read more of this post

Airmic:: ‘Black Swan’ events – avoiding extinction

Practical advice, courtesy of AIRMIC & Marsh. The article is well worth a read even though all it really does is reiterate some of the key points I have been putting across since I started my original blog in 2009!

I have selected this extract as it identifies a huge failing that “stalks” the whole financial and risk sector but about which too few are prepared (or able) to be honest and many are even less forthcoming about its impact: ASSUMPTION.

The truth is that, without a healthy dose of assumption, the basis for flawed economic theory, mathematics that is as misleading as it is elegant and the computing power to turn it all into plausible financial models, they would not find it so, relatively, straightforward to relieve the populous (directly or indirectly) of our hard earned cash to enable them to wield – and abuse – the power that it brings!

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