More Skin in the Game in 2013:: Nassim Taleb [Project Syndicate]


Without sound foundations the global financial sector are little more than licensed “cowboy builders”!

The ancients understood that the builder always knows more about the risks than the client, and can hide sources of fragility and improve his profitability by cutting corners. The foundation is the best place to hide risk. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.

More Skin in the Game in 2013 by Nassim Nicholas Taleb – Project Syndicate

We are ALL funding an industry’s “prediction addiction”


We “know” (well, understand) that we cannot predict the future – which should be pretty worrying for the financial sector, whose success or failure relies upon the frequency and cost of a variety of events that haven’t yet and may never happen. Except that, the expiry date is approaching, for relying upon a steady stream of (mis)information, discredited economic theories, spending vast amounts on personnel and technology that convey the impression of knowledge.

In the absence of “special powers”, insurers have to rely upon what they ‘know’ i.e. what they have learnt from the impact and frequency of past events, that happened to OTHER, similar, risks!

We now have vast quantities of data, accumulated over many years, from a wide variety of sources. The type of information with which Statisticians, Actuaries, Economists (and Carol Vorderman) can have hours and hours of fun, aided by tried and tested techniques, using  the most sophisticated technology in our history. But it doesn’t change the basic fact that we cannot predict the future although we must learn from past events.

The invaluable lessons for our man-made world are, that:

  • non-linear [real world] interactions CANNOT be modelled – concatenated probabilities are still linear
  • we should question what we think we know – you know what they say about assumptions!
  • we cannot manage risk – we CAN influence what is within the scope of our control
  • conventional tools CANNOT identify, map or measure complexity
  • resilience is a function of complexity
  • resilience (or, per Nassim Taleb “anti-fragility”) should be our primary concern
  • we can learn many more lessons from nature Read more of this post

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).

Read more of this post

Insurance, risk & underwriting:: out of the coffee shop and into the light


Underwriting next level Wow! This is a great report from a US firm called Strategy Meets Action and I think that Deb Smallwood has spelled-out a way forward for insurers, MGA’s and brokers who are dithering on what they need to do be “win” in the immediate future and in the longer term, no matter how the landscape changes in coming years.

Don’t get me wrong, whilst the report makes sense of so much that can (does) cloud the mind of insurance executives – who have so many strategic issues to address and an abiding fear of making the wrong call – it doesn’t enlighten them as to “how” they tackle some fundamental failings, such as:

  • how to differentiate between risks that “look good”, according to correlations in data gathered over many years and those that ARE good, based upon a reliable measurement of their current resilience [ability to absorb unforeseen events]
  • how to rate risks for which there is little or no historic data [the truly “new” venture]
  • how to develop and maintain a sensory awareness of, rapidly changing, internal/external factors – threats and opportunities

Real-time visibility is, undoubtedly, a huge advantage in the Digital Age but, that does pre-suppose that the capability to analyse large scale data [Big Data is THE hot topic] exists. But an even more important question is…

…how do you recognise something you haven’t seen before?

That is to say if it is a familiar pattern i.e. risk, something “known”. But hold on a minute, if this is the full extent of what the smart, enabled and aligned, insurer is looking for then that is to fail to recognise that there are “unknowns”. Do we assume that something unfamiliar is irrelevant, an outlier, or investigate to ensure it is not a new, emergent, pattern or risk?

Updated:: who actually benefits from buying “risk protection”?


I attended an interesting seminar last evening [June 2011], arranged by the Institute of Directors and sponsored by Zurich. Interestingly these organisations also provided (by some margin) the most interesting speakers. The Seminar was entitled “The Reality of Managing Risk”.

“Easy” conclusions: the industry prefers to profit from peddling “faux certainty” (in the form of risk modelling) than acknowledge and prepare its customers and shareholders for the REALITY of uncertainty; Managing, even influencing, risk is a minefield – but is made worse when, conventional RM purports to know and be able to “manage” more than it, in reality, can! Insurance industry leaders of the prevailing culture have established that THEY are better served by achieving short-term goals in relation to price, GWP, growth and market share, than by pursuing long term strategies based upon underwriting risk for profit, rewarding a responsible approach to “business resilience” and building stable – sustainable –  transparent – relationships. Read more of this post