Spot the difference for underwriters

This is an aerial view of main location of the risk to be insured: Generic plc.

Company activities at and associated to the premises include: Property Owners; Manufacturing (incl. use of heat & work at height); Assembly (incl. clean room); Warehousing; Import/Export (loading/unloading – incl. quayside); Plant Owner/Operators; Wholesale; Distribution; R&D; Design: IT (mainframe); Admin./Accounts; Training, etc.

For the purposes of the task, let us assume that they are 2, competing, risks both with identical processes, sums insured, limits with similar EML’s, operational structure, growth history, financial performance, global customer/supplier footprint, credit profile, risk management and claims experience. The type of enterprises that are within the target range of risks that you are charged with securing in a competitive market place.

However, one of the risks is, significantly (measurably), more resilient than the other…sufficiently so that it could provide you with the competitive advantage required to secure the account. So, as an insurance, credit or financial risk underwriter:

Q. How do you identify and differentiate between the good and bad risk, providing a verifiable basis for an underwriting decision that enables you to win the business? Read more of this post

Don’t (just) believe your eyes:: heuristics + complexity = guesswork

The perils of making assumptions about the integrity of an object, individual, entity, etc. are beautifully summed up in the familiar expression “never judge a book by its cover”! Despite this knowledge, I will guarantee that we have all done it, regretted it, learnt a (sometimes painful) lesson and moved on. But that still doesn’t stop us from making misjudgements again and again in our daily lives. It’s human nature. Heuristics is a very useful ally to marketers as they can exploit it to “mask a multitude of sins”!

We need to be aware of our own limitations when it comes to dealing with the highly complex. And it doesn’t get more complex than the human body or the digital world of molecular engineering and nano technology. Hence the brief science lesson:

In excess of 99.9% of the “Electromagnetic Spectrum” (below) is outwith our visible spectrum i.e. it is hidden or “invisible” but it is there and it contains information that could, literally, make the difference between life or death! Read more of this post

Roads to Ruin: major corporate failures beyond the scope of risk management

I confess that I haven’t read the full report (it runs to 200 pages) but, between the report itself (link below) and the CII summary document, the message sounds eerily familiar to the voices that have been going round in my head for the last few years!!! Don’t be afraid I am not a threat!

buiding-collapseMuch of what the voices were telling me resulted from extensive research into the nature of complex systems that was prompted by the “genius” of Dr Jacek Marczyk (Founder & CTO at Ontonix). Much of what I have learnt and sought to bring to the attention of those engaged with mitigating and managing risk in insurance (and wider Financial Services) has, unsurprisingly, found its way into the pages of this very blog, numerous Linkedin Group and “real world” discussions.

Whilst my “journey” has been intellectually rewarding the same cannot be said in financial terms!

My experience is such that I don’t expect that there will be rapid and sweeping change as a result of this report. Although, bearing in mind the nature of the risk management “weaknesses” and given what we know about the societal cost of major Corporate failure, it would be perfectly reasonable to ask: why not?

It isn’t as if there haven’t been warnings. This is an extract from a report into systemic risk, prepared during 2006:

Two particularly illuminating questions about priorities in risk management emerge from the report. First, how much money is spent on studying systemic risk as compared with that spent on conventional risk management in individual firms? Second, how expensive is a systemic-risk event to a national or global economy (examples being the stock market crash of 1987, or the turmoil of 1998 associated with the Russian loan default, and the subsequent collapse of the hedge fund Long-Term Capital Management)? The answer to the first question is “comparatively very little”; to the second, “hugely expensive”.

Read more of this post

Governance–Risk–Compliance: accept responsibility to reap the rewards!

We know we can’t make reliable predictions about our environment..but it doesn’t stop us from spending enormous amounts of money to do so. Then to pay for the consequences of getting it wrong!

Introspection needs to get serious and, to do so, go beyond, “how can we improve our margins?” Apparently we don’t like to indulge in too much self-analysis, even though identifying and addressing “flaws” at source makes so much more sense. We can influence, manage or control what we do, why and how we do it. There is very little we can influence outwith our immediate environment. BusinessRisks

To put this into a business context and convey the message about how complex any business can become, consider the following table:

If this is insufficient to convince you that there are enough risks associated with behaviour to be getting on with please consider how many of these could be addressed by a robust Operational structure!

If you still have doubts, perhaps this extract, from a very interesting paper, will help. It was the result of a collaboration between US National Academies/National Research Council and the Federal Reserve Bank of New York on an initiative to “stimulate fresh thinking on systemic risk”.

Catastrophic changes in the overall state of a system can ultimately derive from how it is organized — from feedback mechanisms within it, and from linkages that are latent and often unrecognized Read more of this post

Complexity: What’s in a name?

A widely accepted definition of complexity doesn’t exist. But that isn’t likely to stop any number of Consultancy firms selling services tailored to their own particular interpretation and “solution”.

Numerous Academic institutions dedicate considerable talent and resource to the study of complexity across disciplines.

Many of the “definitions” you are likely to come across convey an impression that complexity is a “twilight zone between chaos and order”! Hardly helpful when it comes to communicating on a subject that is already pretty abstract for many people familiar with  message conventional (but limited) disciplines, such as statistical and actuarial analyses, risk rating or management associated with financial risk. Read more of this post