Is Risk Management a Source of Risk

See on Scoop.it – Complexity & Resilience

If you have risk function, however, that fully understands the business model, the deployment of its operational strategy, the sector the business operates in and the macro-economic and socio-political environment in which it operates, then they will be able to provide risk information that is relevant to the business, and can be understood by the business.

David G Wilson‘s insight:

‘Knowledge’ that fails to distinguish between practises that are based upon sound theory and those that rely upon flawed models and assumption-based modelling, do not lead to understanding but to feedback loops of unintended consequences…patterns and correlations of our own making!

Unidentified sources of risk and ill-informed (albeit well-intentioned) efforts to manage without UNDERSTANDING ‘causal relationships‘ has the opposite of the desired effect…

…unmanaged risk does not dissipate but is a source of systemic risk, mis-managed, it adds complexity is amplified through the business’ interdependencies and interactions, feeding-back as volatility and adding to uncertainty.

‘Conventional wisdom’ (or herd mentality) based upon assumptions of knowledge, can/does impair our ability to understand and address issues at source.

Before we had the tools to increase our knowledge we were ignorant but, to have the tools and not use them is dangerous and costly ineptitude!:

‘Corporate Latency’ is a significant source of, reducible, exposure in every domain and, unless it is better managed, we cannot build resilient systems or create ecosystems that can claim to be truly sustainable.

See on ontonix.blogspot.it

Related articles

• Ontonix S.r.l.: Complexity Profiling and Causality (fitforrandomness.wordpress.com)

Business Insurance:: ISO 31000 should we believe the hype?

Apparently,

“…risk managers should use standards such as ISO 31000, “because standards, no matter what kind or which ones, support key tools and processes.”“Standards allow you to proactively address risks with some discipline,” he said. “Standards also relate well to the whole idea of focusing on outcomes.”

http://www.businessinsurance.com/article/20130602/NEWS06/306029979?template=smartphoneart

Surely the focus should be upon being proactive and ‘managing’ emergent risks, NOT outcomes!?

Where, I suspect, NASA have a distinct (informational) advantage is that the multi-scalar interactions among components, processes, networks of sub-systems and systems are each rigorously tested at every point in assembly and operation…

Ontonix: "Optimal does NOT mean best"

Nowadays it is very popular to seek optimal solutions to a broad spectrum of problems: portfolios,  engineering systems, strategies, traffic systems, distribution channels, networks, policies, etc. But have you ever wondered if optimal really means best? Well, it does not. Optimality is not the most convenient state in which to function. The reason?

Optimal solutions are inherently fragile.

Our economy (but not only) is fragile because everything we do is focused on maximizing something (profits,  performance, success) while minimizing something else (risk, time, investment, R&D) at the same time. This leads to strains within the system. Everything is stretched to the limit (or as much as physics will allow). This is exactly what one should not do when facing turbulence. The focus should, instead, be on:

• Solutions that are fit, not optimal.
  
• Simplifying business models and strategies.
  
• Accepting compromises not seeking perfection. Improve, don’t optimise.

 

Read the full article: Ontonix – Complex Systems Management, Business Risk Management.

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).

Insurance & Reinsurance…as simple as “A, B, C” but much more dangerous!

Apparently my (lone) voice isn’t sufficient to alert the UK financial & insurance industry to the folly of their perspective on “risk”! So, I am eternally grateful to Tim Harford for this presentation!

PLEASE watch this and don’t make the mistake of thinking that the “problem” relates only to Oil disasters, Financial or Nuclear meltdowns. The lesson is that, if the means of communicating INFORMATION, quickly and effectively, between business units, is impaired in complex systems (and that includes relatively small businesses), events WILL happen faster than you or “the system” can react and can have HUGE, unforeseen [not unforeseeable] consequences. This is the nature of the world as we now know it.

Complexity & Close-coupling cause losses!!!

This should be required viewing for every underwriter, risk manager, insurance company executive, banker and regulator…except that many of them already KNOW precisely how risk cascades and spreads. I am constantly amazed how many learned people, in finance and insurance, who  talk about “contagion” and “systemic risk” as if it is something that they don’t have to worry about! THE PROBLEM IS, THEY DON’T KNOW HOW TO ADDRESS THE PROBLEM, SO HAVE FILED IT UNDER “INCONVENIENT TRUTH”, waiting for the time when the shit hits the fan (again) so they can try to convince us that failure was unforeseeable – a Black Swan event – they don’t want to have to admit how little they know about causality, preferring instead to rely upon historic risk data…as if our industrial past holds all the answers we need in our extremely complex, inter-connected, Digital present and future.

Tim talks in great detail about the failures that led to the loss of 167 lives on the Piper Alpha Oil rig and how the sheer volume of data means we can miss vital INFORMATION that could serve as a means of crisis anticipation.

Now, if you have read any of my previous blogs about complexity and risk, you will know that just because “they” say they don’t know what the answer to problem is, doesn’t mean that there is no answer.

BECAUSE THERE IS! This is why I was so excited by what Ontonix, under the inspirational leadership of Dr Jacek Marczyk, had developed and why I keep going on about it DESPITE the enormous challenge of cracking “institutional inertia”.

I would like to highlight a previous article from 2010: Does complexity guarantee “system failure”?

NOT because I am not trying to claim to be so far ahead of the curve here BUT to try to illustrate that the knowledge is out there but too many people who have the power to do something about it AREN’T…go figure!!!

Related articles

• Warren Buffett urges more insurance underwriting discipline… (fitforrandomness.wordpress.com)
• Trade-Off :: Financial System Supply-Chain Cross-Contagion [Dr David Korowicz] (fitforrandomness.wordpress.com)
• Atul Gawande:: Failure and Rescue – The New Yorker (fitforrandomness.wordpress.com)
• Complexity:: understanding living systems (fitforrandomness.wordpress.com)
• Insurance: Feed the beast but ignore the elephant (fitforrandomness.wordpress.com)
• Q. what is the difference between derivatives and reinsurance?:: A. not a lot… (fitforrandomness.wordpress.com)