Updated: Peter L. Bernstein on risk

This is an interview from Jan 2008 (courtesy of McKinsey) in which the, late, celebrated author of Against the Gods: The Remarkable Story of Risk explores the history of risk and how it works in real-world markets and in our lives.

Risk doesn’t mean danger—it just means not knowing what the future holds.

That insight resides at the core of risk management for companies, whether in managing the potential downside of an investment or putting a value on the option of waiting when making irreversible decisions. In this video Peter L. Bernstein also explains why in the real world the most sophisticated mathematical models can sometimes fail.

If I am interpreting his words correctly, Bernstein is advocating a “model free” approach to managing an entity’s ability to withstand the unexpected. Of course this is at odds to the message that insurers, or, more specifically, brokers and intermediaries, actually communicate!

Why? Because, for as long as they derive income from the selling of insurance protection they are unlikely to fully embrace and disseminate a message that is better for business. The best advice that an insurance industry professional can give to a client involves a level of knowledge not normally associated with the modern broker i.e. salesperson, so readily associated with market consolidation.

The message SHOULD be about RISK PREVENTION.

MANAGING THE TOTAL COST OF RISK(MTCR) Insured businesses need to be incentivised to: invest in understanding, measuring and managing risk exposure; rewarded by insurers for their profitability; spending less upon insurance protection. They (and we) need to be re-educated. To be “weaned off” the dependency upon over priced insurance products OK, there has been an argument for insurers relying upon investment returns to compensate for poor underwriting results. But, in such an uncertain financial climate, this manifestation of the prevailing business culture…YES, the one that got us into this mess…cannot constitute a credible strategy for an insurer!!?

As an industry we need to come clean. Responsible insurers need to lead a move back to QUALITY (profitability) over QUANTITY (income). It all adds up to REPLACING UNSUSTAINABLE RATING AND (BROKER) REMUNERATION WITH SUSTAINABLE CUSTOMER VALUE. How else do you think that as an industry, we can restore trust and respect!? The reward for insurers who are “early adopters” of much needed TRANSPARENCY could be huge.

“Very few businesses (in the insurance industry) can afford transparency but NONE can afford NOT to be transparent”

THAT is the basis of a credible strategy for difficult and uncertain times.

The alternative is to sit tight and hope that the conditions improve (PLEASE don’t hold your breath) but when the next bubble bursts you had better ensure that your business is not saddled with debt and is fit enough to survive…it’s a bit of a test to see which companies have been practising what they preach. Survival of the fittest! A fact of the evolutionary process….

I have a range of tools, products and strategies to deal with these various issues and would love a platform to share these with smart companies.

If that doesn’t appeal then hold on to your hats, enjoy the ride and only scream if you want to go faster because stopping is not an option and jumping could be fatal!

Updated: Enterprise Risk Management & Complexity analysis

Surely it makes sense to any “tuned in” business leader to embrace ERM!? I think this graphic (from RIMS) beautifully illustrates the various, generic, component parts. So, why then, have so many been so slow to adopt this approach?

Risk and Insurance Society Risk Maturity Model©, 2006, www.RIMS.org

imageIn truth I don’t know but this is my blog so I am entitled to take a crack at providing my take on the answer.


How much time will this take?

What amount of resource will I need to commit?

How much will it cost…can WE afford it?

How can I quantify the benefit to the business?

Where the hell do we start?

All pretty reasonable questions especially when you consider that most responsible business leaders will already be complying with the terms from their insurers and the minimum legal requirements to enable them to trade.

Management time is already at a premium…isn’t that part of the problem(?)..this hardly looks like a solution. Most senior managers would be entitled to visualise working by candlelight, lost weekends, absentee father status and more issues surrounding “work/life balance”. Oh oh!!!

Where is the incentive for risk and business managers to “step up to the plate” and become RISK LEADERS? After all, the prevailing business culture is dedicated to rewarding those who satisfy the lust for a quick return…and that is very rarely the case with a well constructed strategy aimed at mitigating risk.

It looks all-encompassing and very impressive but it does beg the further question

“do I fit the model to the business or the business to the model?” Read more of this post