Revisiting “networked networks”:: setting the scene for epic failure!

To say that there are those within the insurance industry who prefer the PR (or is it bs?) about insurance not being “systemically important” would be an understatement! But, I can almost forgive them their ignorance as they tend to be too busy doing what they have to do to survive, on a day-to-day basis, in difficult times. However, as someone who cares about the stability of the industry and a committed contrarian it would be wrong of me NOT to continue to advise and inform about something that could have such a significant upon their future financial well-being!

Quite apart from concerns about the behaviour of complex systems (see below), the insurance industry relies upon rating future risk based upon probabilities seen in incomplete data from past events, with an unhealthy smattering of assumptions for good measure…like Groundhog Day! But, even if this were as scientific as the industry would like us to believe, the risk models upon which they rely DO NOT/CANNOT cope with the non-linearity of a non-interacting network let alone that of interdependent networks (below).

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Systemic Risk:: are insurers “systemically important”? – Insurance Insight [poll]

Insurance Insight poll question result

roadsignLast week Insurance Insight asked for opinions:

Is it right not to label insurance companies as systemically risk institutions?

Research by the Geneva Association has found an insolvent global insurer would not pose systemic risk to the global financial system. It, therefore maintains that insurance companies should not be labelled systemically risks institutions.

The stakes are so high that erring on the side of caution is the only prudent course…but I suspect that we will just have to wait and see if we get lucky – Systemic Risk:: deep collapse in “nested adaptive cycles”

Insurance Industry:: super-spreaders of systemic risk

Who do you believe…not who do you want to believe? Are they or aren’t they?panic button

I am far from an expert on the subject but, from what I do know, I have a “bad feeling” about aspects of the Geneva Association perspective and UK stance (as opposed to USA) on what constitutes “systemically important”. Rather than repeat myself, I have outlined my thoughts in this article which contains links to other, related, items.

If you are interested in getting deeper into the subject, particularly if you like getting into the maths, you are going to have fun with this paper from Nov. 2011: Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors Read more of this post

“Insolvent insurers not a systemic risk”– Insurance Insight

Link to report

Well that is reassuring…isn’t it!?

I have (quickly) read through the report and, whilst it is hard to argue that, based upon past experience, Insurers and Re-insurers ARE of “systemic importance”*, several key points appear to be overlooked…or, perhaps ASSUMED. Probably not the best starting point for such a, potentially significant, report!

Here are a few of the issues that struck me as worthy of comment, or questions:

  • impact of sovereign/banking default or collapse [cascading] on Capital liquidity
  • the inter-connections amongst individual (micro) and institutional investors (macro)
  • lack of transparency in relation to “counter party” relationships          [ins – ins – rein – fin. mkt. – ins – rein, etc.]
  • insurers obtain adequate information to understand, accurately assess and rate risks*, that are,
  • mostly idiosyncratic and uncorrelated”, and
  • “insured loss events are not normally correlated with financial crises or economic cycles” [risk – “known”]
  • reserve and reserving adequacy
  • customer/insurer, etc. implement effective risk management – dampens rather than amplifies risk
  • there is no need to differentiate or adapt risk strategy for uncertainty [unseen – “unknown”]
  • “complexity” is NOT a source of “unseen” risk that, unmanaged, adds to uncertainty
  • major sources of risk are exogenous
  • failure or collapse are gradual, manageable and “top down”
  • Reputational or Operational risks are not  major threats…

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“Helping Banks is Hurting Insurance Industry” Geneva Association Tells G20

Collapse_smallPlease forgive me for not reaching for the paper tissues  THE real story is that helping banks is hurting …SOCIETY!

Without doubt, the activities of billions of ordinary citizens did not give rise to systemic risk! FACT!

Do we really need to ask, in whose interest is it for the insurance industry to tell only half a story?

OK, so the language is clever “…traditional insurance activities do not give rise to systemic risk”. Hard to argue with. But this communiqué smacks of insurers’ girding their loins in anticipation of the fallout from further, inevitable, global financial turmoil.

Presumably choosing to distance themselves and pointing their fingers at the banks is intended to stave off the threat of further regulation. Even if that is, ultimately, unsuccessful, it may serve to delay unwanted scrutiny and provide the opportunity to adapt the current model. It could also be touted to hard-pressed businesses as a “justification” of a potential tsunami of premium increases that may follow the next financial earthquake: growing seismic activity in the markets serve as a warning.

The insurance industry is, hardly, in the “innocent bystander” category!

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